IMI plc Annual Report & Accounts Engineering GREAT the IMI Way

Transcription

1 IMI plc Annual Report & Accounts 2016 Engineering GREAT the IMI Way

2 Introduction Chairman s statement 02 Group overview Strategic Review Our Chief Executive reviews 2016 and outlines our strategy and the progress we are making. Our purpose is to deliver great solutions that tackle the most demanding engineering challenges. We help some of the world s biggest industrial companies operate their processes safely, cleanly, efficiently and cost effectively. We operate through three divisions IMI Critical Engineering, IMI Precision Engineering and IMI Hydronic Engineering and employ 11,000 people in over 50 countries around the world. Performance at a glance 06 Chief Executive s review 10 Our strategic model 12 Strategic growth priorities 22 Operational review 28 Corporate responsibility 38 Measurements and targets 40 Principal risks and uncertainties Reported revenue* 1,649m Reported profit before tax* 208m -5% Statutory revenue 1,657m Statutory profit before tax -5% 165m +6% +2% Corporate Governance Segmental operating margin* 13.8% -160bps Operating cash flow* 246m +6% We introduce our Board, and explain our governance structure and how it operates. 46 The Board 48 Letter from the Chairman 49 Corporate Governance Report 55 Audit Committee Report 58 Nominations Committee Report 59 Directors Remuneration Report Financial Statements Our financial statements for the year presented in a user-friendly format. Reported basic earnings per share* 59.8p -4% Total dividend for year 38.7p Significant progress on strategic initiatives Results in-line with market expectations Strong operating cash flow of 246m Recommending a 1% increase in the full year dividend De-risking of global pension liabilities with UK remaining in surplus +1% 74 Finance Director s introduction 76 Primary statements 84 Section 1 - Basis of preparation 85 Section 2 - Results for the year 96 Section 3 - Operating assets and liabilities 102 Section 4 - Capital structure and financing costs 126 Section 5 - Other notes 132 Directors Report 154 Five year summary 156 Shareholder and general information The Strategic Report on pages 4 to 43 has been approved by the Board of Directors and signed on their behalf by Mark Selway, Chief Executive, on 23 February * These figures are non statutory alternative performance measures. See page 85 for explanations and rationale for using these and the associated definitions and reconciliations to statutory measures. Throughout this Report, unless otherwise stated, references to revenue and profit before tax are on a reported basis. References to operating profit, unless otherwise stated, relate to reported segmental operating profit.

3 Annual Report and Accounts Chairman s statement Good progress in a tough environment Introduction Despite difficult market conditions our results for 2016 were in-line with expectations and the Group continued to deliver against our ambitious strategic objectives. The combination of necessary management actions to address the current market difficulties and the continued progress in the execution of our strategy underpin our plans to enhance customer relationships, grow our market shares and further improve working capital. The Group s balance sheet is strong and our operations are inherently cash generative which provides the headroom to invest in organic development and appropriate acquisition opportunities as they arise. Lord Smith of Kelvin Chairman Continuing to execute our strategy During 2016, the considerable work being undertaken to improve our businesses gained traction as we continued to improve both our operations and our customer offering. The strategic initiatives behind that work remain our priority, despite the market headwinds our industry currently faces. There is no question that IMI is becoming a stronger, more efficient and more competitive company capable of delivering long-term sustainable growth. As our businesses continue to improve, the resulting benefits are becoming increasingly evident to our customers improved on-time-delivery, faster response times and reduced scrap rates are the fundamental pre-requisites that will confirm IMI as a world-class supplier. We have also improved significantly our product offering in 2016, having launched many new products and re-vitalised our go-to market and sales strategies in several parts of the Group. All of these initiatives are significantly enhancing our customers service experience and our competitiveness. More details about these positive developments are set out in the Chief Executive s review on pages 4 to 43. Our people The improvements being made in all parts of the Group are due to our people who, despite the on-going difficult economic and market conditions, are relentlessly driving our many strategic and operational growth initiatives. I have seen this first hand during the site visits we undertook during the year. In October, the Board met in Germany where we had an opportunity to visit Hydronic Engineering s plant in Erwitte and Precision Engineering s Buschjost operations. In both locations the progress has been impressive and the hard work and enthusiasm of employees were clearly evident. Strategic Review Corporate Governance Financial Statements Dividend Reflecting continued confidence in the Group s prospects, the Board is recommending a final dividend increase of 1% to 24.7p (2015: 24.5p) making a total dividend for the year of 38.7p, an increase of 1% over last year s 38.4p. Looking ahead This is an exciting time to be part of IMI. Our various strategic growth initiatives are laying the foundations for long-term shareholder value creation. Today our underlying business is stronger and our ability to compete and win in the marketplace is being significantly enhanced. We will be very well placed to deliver accelerated growth and sustainable and profitable progress as market conditions improve. Board details Turn to page 46 Corporate Governance Turn to page 49

4 2 IMI plc Group overview IMI plc is a specialised engineering company that designs, manufactures and services highly engineered products that control the precise movement of fluids. IMI Critical Engineering is a worldleading provider of critical flow control solutions that enable vital energy and process industries to operate safely, cleanly, reliably and more efficiently. Revenue 651m Operating profit 81.8m Number of employees 3,700 Revenue by geography RoW 7% UK 4% Emerging Markets 51% Western Europe 16% North America 22% IMI Critical Engineering operational review Turn to page 22 IMI Precision Engineering specialises in developing motion and fluid control technologies for applications where precision, speed and reliability are essential. Revenue 708m Operating profit 118.5m Number of employees 5,300 Revenue by geography RoW 4% UK 7% Emerging Markets 19% Western Europe 44% North America 26% IMI Precision Engineering operational review Turn to page 24 IMI Hydronic Engineering is the leading global supplier of products for hydronic distribution systems which deliver optimal and energy efficient heating and cooling systems to the residential and commercial building sectors. Revenue 290m Operating profit 51.9m Number of employees 1,900 Revenue by geography RoW 1% UK 2% Western Europe 72% Emerging Markets 19% North America 6% IMI Hydronic Engineering operational review Turn to page 26

5 Annual Report and Accounts IMI s global footprint Group revenue by geography Group revenue by division RoW 5% UK 5% Emerging Markets 31% Western Europe 38% North America 21% IMI Hydronic Engineering 18% IMI Critical Engineering 39% IMI Precision Engineering 43% Introduction Key brands IMI Bopp & Reuther, IMI CCI, IMI Fluid Kinetics, IMI InterAtiva, IMI NH, IMI Orton, IMI Remosa, IMI SSF, IMI STI, IMI TH Jansen, IMI Truflo Marine, IMI Truflo Rona, IMI Truflo Italy, IMI Z&J, IMI Zikesch Major operational locations Belgium, Brazil, China, Czech Republic, Germany, India, Italy, Japan, South Korea, Sweden, Switzerland, UK and USA Key brands IMI Norgren, IMI Buschjost, IMI FAS, IMI Herion, IMI Maxseal Major operational locations Brazil, China, Czech Republic, Germany, Mexico, Switzerland, UK and USA Power Oil & Gas Petrochemical Actuation We are the world leading supplier of engineered to order turbine bypass valves for critical applications in conventional and nuclear power plants helping to provide the safest, most reliable and efficient power generation Revenue: 280m We supply anti-surge valve and actuator systems to the world s largest LNG compression facilities. Our systems are capable of ultrafast response to maximise LNG production while protecting the critical process equipment Revenue: 187m We design and manufacture integrated flow control systems for critical applications in Fluid Catalytic Cracking. We also supply bespoke valves into the ethylene, polypropylene and delayed coking production processes Revenue: 98m Industrial Automation Commercial Vehicle Oil & Gas Life Sciences We supply high performance products including valves, valve islands, proportional and pressure monitoring controls and air preparation products, as well as a comprehensive range of pneumatic actuators Revenue: 396m We design and manufacture a range of cab chassis and powertrain solutions which deliver fuel efficiency, emissions reduction and faster assembly times for the world s leading commercial vehicle manufacturers Revenue: 161m We offer a comprehensive range of products which deliver precision control in even the harshest environments, including stainless steel valves and regulators, nuclear class valves and emergency shutdown controls Revenue: 63m We focus on the design and production of complete actuation systems to operate industrial valves for the most demanding applications and processes in terms of forces, speed and accuracy Revenue: 27m We supply precision flow control solutions used in medical devices, diagnostic equipment and biotech and analytical instruments. We help to reduce the size of customers products, while enhancing accuracy, throughput and fluid control performance Revenue: 57m Strategic Review Corporate Governance Financial Statements Key brands IMI TA, IMI Flow Design, IMI Heimeier, IMI Pneumatex Major operational locations Germany, Poland, Slovenia, Sweden, Switzerland and USA Balancing & Control Thermostatic Control Pressurisation Water Quality Our hydronic balancing and control solutions enable buildings to keep comfort at the right level while increasing HVAC efficiency by up to 30%. Our expertise covers constant and variable flow and both static and dynamic balancing Revenue: 145m We design and manufacture thermostatic control systems which guarantee direct or automatic control of radiators and underfloor heating systems to precisely control individual room temperatures Revenue: 102m Reliable pressurisation is a basic requirement for a trouble-free operation of heating, cooling and solar systems. Our robust range of pressure maintenance systems with compressors or pumps and expansion vessels maintains the right pressure in the system at all times Revenue: 31m The single most important component in any hydronic system is the water itself. When compromised, the effects can significantly impact the efficiency of the system. Our dirt and air separators and pressure step degassers protect the installation by keeping water free of microbubbles and sludge Revenue: 12m

6 4 IMI plc Strategic Review 06 Chief Executive s review 10 Our strategic model 12 Strategic growth priorities 22 Operational review 28 Corporate responsibility 38 Measurements and targets 40 Principal risks and uncertainties Engineering GREAT the IMI Way Preparing to machine a butterfly valve component in IMI Orton, Italy

7 Annual Report and Accounts Group Introduction Overview Strategic Review Corporate Governance Financial Statements

8 6 IMI plc Chief Executive s review Building competitive advantage 2016 was another year of important progress for IMI. As well as continuing to improve both our operational performance and our customer offering, we have acted decisively to ensure our cost-base continues to support our growth ambitions while also protecting near-term performance. Mark Selway Chief Executive Improvement despite headwinds 2016 was a year of significant progress for the Group with results in-line with market expectations despite continuing headwinds in a number of our key markets. Our various initiatives have further improved operational performance, and on-going investment in great new products and customer solutions has enhanced our market competitiveness. Trading conditions in many of our geographies and markets remained difficult throughout The cautious industrial investment environment continued to impact new order opportunities as customers tightened spending in the face of economic and political uncertainty. The Oil & Gas market, which represents almost a third of Critical Engineering s revenues, continued to be impacted by falling investment, including a significant reduction in liquid natural gas (LNG) projects. The Power generation sector was impacted by lower operational spending reflecting delays, particularly in North America, where power providers have extended the time between planned outages. While European and Asia Pacific truck markets remained resilient, the US heavy truck market declined significantly which impacted revenues in Precision Engineering. Industrial Automation markets globally were broadly flat with some signs of recovery in Europe and North America in the final quarter of the year. In Hydronic Engineering, European construction markets remained subdued with warmer weather impacting the heating season. In addition, North America and China experienced some project delays. In response to the protracted deterioration in several of our most important markets, the Group has undertaken a number of restructuring activities that will continue into These actions include the sale or closure of eight lower growth, higher cost Critical Engineering sites and the reduction of operating costs across the entire Group. In Precision Engineering, in-line with our strategy to simplify the business and ensure that we have the most efficient platform for future growth, the division undertook an extensive review of its operational footprint. The review named Project Janus is now being split into two phases. The implementation of Phase 1 has already begun and involves those projects that can be executed quickly and with the least disruption to our business. This includes a structured programme of cost reductions, insourcing to Strategic timeline Year 0: The hard work begins Year 1: Increased investment Year 2: Benefits starting to show Year 3: Nearly firing on all cylinders Year 4: Up to full speed Ambition: Double operating profits Supported by value enhancing acquisitions

9 Annual Report and Accounts Reported profit before tax 208.0m m Down 5% 208.0m Segmental operating margin 13.8% increase machining capacity utilisation, simplification of the organisational structure and further leverage of our low cost European manufacturing operations. A second phase is contingent on market conditions and anticipates potentially substantial and more complex changes, particularly in areas such as Commercial Vehicle, where significant new project quotation activity exists. All of these actions will help to protect operating margins and improve our competitive position in what remains an uncertain market environment. In Hydronic Engineering, the subdued environment in key European markets, combined with greater efficiencies resulting from the IT and operational improvements, have provided the basis to reduce operating costs, which will be evident in the division s activities in Results overview Reported Group revenues were 6% higher at 1,649m (2015: 1,557m). Excluding favourable exchange rate movements and disposals, Group revenues on an organic basis were 5% lower due to continuing difficult end markets. Reported segmental operating profit was 5% lower at 228m (2015: 239m). Excluding the impact of favourable exchange rate movements and disposals, segmental operating profit was 17% lower on an organic basis reflecting lower volumes and continued investments, partially offset by the benefits of restructuring. The Group s operating margin was 13.8% (2015: 15.4%) and reported earnings per share were 4% lower at 59.8p (2015: 62.2p). Operating cash flow of 246m (2015: 232m) reflected the benefits of the Group s lean initiatives which underpinned working capital improvements in the year. Net Debt of 283m (2015: 237m) was impacted by adverse currency of 97m and resulted in a Net Debt to EBITDA ratio of 1.0x against 0.9x at the end of % Down 160bps 13.8% Good strategic progress It is particularly rewarding to report a further year of successful execution of our strategy. Key achievements, including a significant and positive cultural shift with a passion for continuous improvement, improved operational performance and success in our endeavours to add high quality products across all three divisions, have all contributed to our results in We move forward with confidence that we will achieve world-class performance by 2019, as envisaged in our original 2014 plan. Our objective to double operating profit by that point also remains our goal, although achieving that will clearly rely upon a more favourable market environment, and will almost certainly be reached beyond the original 2019 timescale. Improving our operational performance Improving operational performance is fundamental to our objective of creating competitive advantage and remains a key part of our strategic growth plan. During the year the efficiency of our operations improved significantly. Our operational improvements are assessed twice yearly using an industry recognised lean benchmarking methodology. During 2016, the Group s average lean score has continued to improve, and ended the year at 66% against 59% at the same point in As a result of more efficient operations, scrap rates continued to improve, on-time-delivery and inventory management both made good progress and the benefits were evident in the Group s working capital in the year. This improved productivity and operational performance provides an important foundation to underpin our increased competitiveness and responsiveness to customers. Introduction Strategic Review Corporate Governance Financial Statements IMI Critical Engineering has world-class cryogenic testing facilities, for all classes of valves. Here butterfly valves are being lowered into the liquid nitrogen The IMI Executive team discover Hydronic Engineering s new Zeparo G-Force turnable dirt separators at the plant in Switzerland Mark Selway with Oliver Wehking, Managing Director of IMI Buschjost, on a visit to Precision Engineering s site in Germany

10 8 IMI plc Readying our businesses for growth In the past two years, we have invested heavily in new systems and processes which are essential to the Group s sustainable competitive advantage. During 2016 new integrated IT systems, that make day-to-day operations more cost and time efficient, were successfully installed on-time and on-budget in Critical Engineering s plants in Sweden, Japan, India and Korea, two of Precision Engineering s US operations, Hydronic Engineering s Polish plant and at its headquarters in Switzerland. In 2017, Critical Engineering will roll out an additional six sites in the US and Asia, Precision Engineering will complete their remaining sites in the US, and Hydronic Engineering will largely complete the vast majority of their factories and sales offices. In addition to much needed IT investment, our focus also extends to embedding disciplined and efficient processes, including New Product Development, competitor product tear-downs and the application of Value Engineering. These processes underpin the sustainability of continuous improvement and ensure that investment ultimately delivers an earlier and greater return. Much has been achieved to simplify the way our businesses operate. New product portfolios Our focus on New Product Development gained significant momentum during the year and as a result we have expanded our portfolio of great new products which enhance the competitiveness of the Group. The Group s advanced product

11 Annual Report and Accounts quality planning process (APQP) and competitor product tear-downs have resulted in the development of an industryleading range of platform products in Precision Engineering which represent the first significant investment for more than 10 years. During the year Hydronic Engineering maintained its development pipeline and launched 13 new products while Critical Engineering introduced a significant number of enhanced products. All three divisions have ambitious plans to continue their product development strategies in 2017 and beyond. Compelling customer solutions During the year, Critical Engineering developed an aggressive Value Engineering programme to enhance its competitiveness. Despite challenging market conditions, Value Engineering helped to deliver new orders totalling 80m at historic margin levels while providing, on average, a 15% cost reduction for customers. In addition, Value Engineering has opened up a number of new product markets where we are now able to offer our world-class valve technologies, providing an additional basis for profitable growth. Revised go-to-market strategies In our Precision Engineering division, following the work undertaken in 2015 to identify the markets that offer the greatest growth potential, the division s US and European operations have been reorganised around key industry verticals of Industrial Automation, Commercial Vehicle, Life Sciences and Energy. This new structure delivers sector marketing strategies that address distinct customer requirements, target specific market opportunities and build stronger customer relationships. In November, Precision Engineering launched an innovative IMI Norgren Express App which enables customers, using their smartphones, to identify, locate and purchase replacement parts quickly and easily. Business development Alongside our organic growth initiatives, targeted acquisitions that meet our clearly defined and disciplined criteria remain a core part of our strategy. While market conditions have reduced the pipeline of opportunities, we continue to refine our targets, enhance our integration processes and make our underlying businesses stronger, all of which will facilitate the success of any future developments. Our people As the Chairman highlights in his statement, the progress that we continued to make in the year is due to our employees around the world. I would like to thank them for their hard work and on-going drive and passion to deliver our strategic ambitions. I am pleased to report the significant cultural progress which has been achieved across the whole of IMI. The business today has a passion for continuous improvement and the ambition to improve competitiveness and deliver better customer outcomes is firmly embedded throughout the organisation. I remain convinced that these core ambitions underpin the future success of IMI. Outlook Based on current market conditions, we expect organic revenues in the first half of 2017 to reflect a similar percentage reduction to the first half of 2016, with margins slightly lower than the first half of last year. Results for the full year are expected to include a second half bias reflecting the timing of restructuring benefits and normal trading seasonality. Introduction Strategic Review Corporate Governance Financial Statements Executive Committee Mark Selway Chief Executive Daniel Shook Finance Director Roy Twite Divisional Managing Director, IMI Critical Engineering Massimo Grassi Divisional Managing Director, IMI Precision Engineering Peter Spencer Divisional Managing Director, IMI Hydronic Engineering Paul Roberts Group Business Development Director Geoff Tranfield Group Human Resources Director John O Shea Group Legal Director and Company Secretary

12 10 IMI plc Our strategic model Our business model is built around our core strategic priorities of capitalising on growth opportunities, operational excellence, investment in product development and targeted acquisitions. Continuous investment in these areas will deliver improved, more innovative products and services to our customers and help us increase our competitive advantage. By meeting our customers needs and investing in our leading market positions, we are well placed to grow profitably to the benefit of all stakeholders including our shareholders. Engineering GREAT the IMI Way Manufacturing and selling innovative products and services to our chosen markets 1. Capitalising on significant organic growth opportunities 4. Expand addressable markets through targeted acquisitions Our ambition: to become a world-class business and leader in our chosen sectors to deliver sustainable accelerated top and bottom line growth 2. Improving operational performance Capturing aftermarket opportunities for spares, support and service 3. Increased investment in product development Goal Organisation structure How we generate our revenue Strategic growth priorities Strategic enablers

13 Annual Report and Accounts Strategic growth enablers To deliver our strategic growth objectives while capitalising on the geographic and operational capabilities of the Group we have outlined the following key strategic enablers. Introduction Working together as one simplified IMI To harness the Group s full potential we remain determined to channel and maximise our scale to act as one IMI. Establishing core processes has provided a strong platform that underpins a framework for creating consistent Group wide standards and behaviours. Originally developed by our Precision Engineering division, the structured performance testing, tear-down and detailed analysis of competitor products is a key part of our new product development process. This tear-down procedure, which ensures that our new products will out run the competition, has now been adopted within the divisions development processes. It is one of several disciplines that have been embraced by all three of the divisions as they share best practice. Maintaining financial discipline Investing in Group-wide IT and infrastructure As we execute our strategy to deliver accelerated growth, we will continue to maintain financial discipline. Capital will be allocated to drive organic growth, maintain a progressive dividend policy in line with earnings and fund acquisitions. Whilst retaining flexibility to develop IMI s full potential, we will continue to focus on maintaining an efficient balance sheet and, in the event of us having cash in excess of the Group s current needs, we will return this excess capital to shareholders. Through the life of our five year plan we will work to maintain net debt to EBITDA of no more than two times through the cycle. Net debt to adjusted EBITDA x x Strategic Review Corporate Governance Financial Statements The programme to equip our businesses with effective IT is well underway with the first sites either launched or on track to do so across all three of the Group s operating divisions. This commitment, alongside selective investment to upgrade or replace our manufacturing facilities, and our on-going initiatives, is a pre-requisite to achieving our strategic goals. IT implementations are being phased on a site by site basis to minimise risk and deliver an optimal solution. Overall capital spending is progressively increasing to closer to two times depreciation where it will remain for the first few years of the plan. During 2016 all three divisions have progressed their ERP programmes. In Critical Engineering, implementation has taken place in Japan, Sweden, India and Korea. In Precision Engineering, it has been installed in two facilities in the US and Hydronic Engineering have rolled it out at their facility in Poland and their HQ in Switzerland.

14 12 IMI plc Strategic growth priorities Capitalising on significant organic growth opportunities The Group currently operates in attractive end-markets and to achieve our ambitions we must focus on those that offer the greatest potential in terms of delivering top and bottom line growth. Our priority is to capitalise on those end-markets where we already are, or have the potential to be, in a leading position markets where we can grow and where there are significant higher margin aftermarket opportunities. World-class facilities support our customers in high potential markets In South Korea, home of some of the world s largest engineering design houses, IMI CCI s manufacturing facility at Paju, a city to the North West of Seoul, achieved several significant milestones during the year. Opened in 2015, the Group s lean operational processes are now embedded in all parts of the facility and it is now recognised as the most efficient plant in the Critical Engineering division. IMI Critical Engineering Field Service Engineers ensure our customers plants run optimally around the world Focusing on markets that offer the greatest growth The Asian market offers significant growth potential and we have been expanding our presence in the region. In China, our enlarged footprint has enabled us to localise the manufacture of a number of our products for the Chinese market at our manufacturing plant in the Qingpu Industrial Zone. This development brings us closer to both our existing customers and a range of potential new customers, and it also enhances our cost competitiveness. Case studies on-line The engineering team at IMI CCI Florence ensure the highest safety integrity levels on our High Integrity Pressure Protection Systems New product development processes have been accelerated and, during the year, an enhanced range of conventional valves, which significantly expand our power sector product offering, were developed and launched. In March 2016, following extensive reviews of its engineering and quality assurance systems, its products and facilities, the business was additionally awarded approved supplier status for semi-severe control valves by Korea Hydro and Nuclear Power Co. Ltd, the largest power generation company in South Korea which provides approximately 30% of the country s electricity supply.

15 Annual Report and Accounts The product development team in Fellbach, Germany Electronic testing of new products Driving growth with a new go-to-market strategy In 2015 we undertook an extensive review of all the businesses within our Precision Engineering division to identify the markets and products that offered the greatest potential to deliver the best returns. Building on the findings of this review, during the year we changed our go-to-market strategy and put in place a new regional, vertically focused, organisational structure. Case studies on-line Broadening our market presence and customer reach Our Hydronic Engineering division is a market leader in products for water-based heating and cooling systems and room temperature controls. In 2015 we capitalised on this leadership position and strengthened our over-the-counter sales channel by securing a strategic partnership with one of the largest European wholesalers of building parts and materials. Case studies on-line Given the diversity of products and brands in the division, and the differences in the markets and regions where we operate, by structuring our operations by region in accordance with the key verticals we serve Industrial Automation, Commercial Vehicle, Life Sciences and Energy we are now able to provide a bespoke offering tailored to our customers specific requirements. In particular, we can now execute country and vertical marketing strategies that address distinct customer requirements, and target specific market opportunities focused on building stronger customer relationships. By organising our businesses in this clear way, both visibility and accountability across our operations have been greatly improved. With a single regional leadership team, we are all able to drive our lean and other operational improvement initiatives more consistently and effectively. This new organisation structure was adopted across our US businesses during the first half of 2016 and in the second half of the year, following the merger of our Western Europe and Continental European operations, it was implemented in our new single European business. Packaging designed to grab attention hits wholesaler shelves across Europe This key development extends and underpins our international market presence and enables us to penetrate the European market faster, particularly in the small residential and renovation segment. During 2016 much progress has been made to further enhance this route to market. In particular, a number of new agreements have been entered into with major wholesalers such that we now have a growing distributor network with broad international reach. To capture the market opportunity that this provides, we have redefined our sales team s roles and responsibilities to ensure that we have dedicated resource focused on our distributor customers. Introduction Strategic Review Corporate Governance Financial Statements

16 14 IMI plc Strategic growth priorities Improving operational performance The benefits of moving towards and achieving best in class operational performance are very significant. As we improve how our businesses operate we will better utilise capacity, enhance our competitiveness, reduce working capital and generate cost savings by operating more efficiently. By doing this, we will also improve services for our customers. Our ambition is to progressively self-fund our organic growth initiatives using the benefits generated from our operational improvements. We are on a self-help lean journey, underpinned by the engagement of management and employees at all levels and we remain absolutely confident that embedding lean across the whole of IMI is the best way to deliver and sustain our achievements. The 10 areas of lean All sites are benchmarked against these areas of lean every six months Status as of December 2016: 9. Material Control 8. Total Productive Maintenance 10. Level Production 1. Cultural Awareness 2. Visual Management & Housekeeping 3. Standardised Work 4. Flexible Operations The operational performance of every site in the Group is benchmarked every six months against the ten areas of lean and significant progress has already been achieved. A world-class operational performance score is 85% or higher. At the time of the first benchmark in 2014, none of our facilities came close to achieving this, with the average score being 31%. At the most recent review, the average score reached 66%, and our Hydronic Engineering division now has two facilities with a world-class score. All of our businesses continue to implement detailed plans to achieve world-class performance by Quick Changeover 5. Continuous Improvement IMI Critical Engineering IMI Precision Engineering IMI Hydronic Engineering 6. Error Proofing World-class > 85% The lean assessment score for every IMI site is available for all employees to view via the lean benchmarking application on the global intranet. Benchmarking identifies best practice within IMI and provides visibility of where to focus improvements and where to go for assistance to improve performance going forward.

17 Annual Report and Accounts First assessment (average 24%) 2014 Year-end assessment score (average 38%) 2015 Year-end assessment score (average 56%) 2016 Year-end assessment score (average 62%) 2017 Year-end target (average 67%) Site key: 1 IMI CCI Korea 2 IMI CCI RSM 14 IMI SSF 15 IMI Z&J Germany Introduction % score Site Modern, lean and efficient plants result in competitive, highly engineered products Driving efficiency to offset market conditions As highlighted in the Chief Executive s Review on page 6, in many of our markets we are facing challenging trading conditions. To ensure that we continue to be competitive and remain on the path to sustainable growth in our Critical Engineering division, we have undertaken a number of cost management initiatives and accelerated some of the improvement projects which were scheduled for implementation in the later phases of our five-year strategic plan. As part of the consolidation of our European manufacturing footprint we have created an engineering centre of excellence within IMI Z&J s manufacturing plant in Düren, Germany. Using the new and improved R&D facilities within the centre, IMI Z&J has accelerated its new product pipeline and developed a number of lighter, more efficient and cost effective products. Continuous improvement is embedded in our culture and we continue to work towards achieving world-class operational performance in all our businesses. During the year, across the whole of our Critical Engineering division, approximately 12,000 improvement actions have been undertaken. 3 IMI CCI Brno 4 IMI CCI SriCity 5 IMI CCI Japan 6 IMI STI 7 IMI Critical Engineering Houston 8 IMI Fluid Kinetics 9 IMI InterAtiva 10 IMI Truflo Marine 11 IMI Critical Engineering China 12 IMI Remosa 13 IMI Orton 16 IMI Bopp & Reuther 17 IMI Truflo Rona Belgium 18 IMI Truflo Italy IMI CCI designs actuation and control systems to deliver the highest safety levels in the world As a result, our lean score assessments have improved year-on-year and we are continuing to reduce our operating costs, with an overarching objective of enhancing our market competitiveness. During 2016, our operational infrastructure was further strengthened. New IT systems were installed in more of our factories, including our plants in Sweden, Japan, India and Korea, and the Obeya project management system which significantly enhances our project management capabilities, is now operating in Critical Engineering s major plants around the world. Strategic Review Corporate Governance Financial Statements

18 16 IMI plc First assessment (average 33%) % score Site 2014 Year-end assessment score (average 47%) 2015 Year-end assessment score (average 59%) 2016 Year-end assessment score (average 66%) 2017 Year-end target (average 70%) Site key: 1 IMI Norgren Seattle 2 IMI FAS Switzerland 3 IMI Norgren Brno 4 IMI EDC Warehouse Alpen 5 IMI Poole 6 IMI Norgren Germany Fellbach 7 IMI Norgren Detroit 8 IMI Norgren Queretaro 9 IMI Norgren Australia 10 IMI Norgren China 11 IMI Buschjost 12 IMI Norgren India 13 IMI Norgren Singapore 14 IMI Norgren Warehouse Louisville 15 IMI Leeds 16 IMI Norgren Germany Alpen 17 IMI Norgren Fradley 18 IMI Bristol 19 IMI Norgren Littleton 20 IMI Norgren Farmington 21 IMI Norgren Brookville 22 IMI Norgren Brazil 23 IMI Herion Systemtechnik 24 IMI IMF 25 IMI Norgren Las Vegas Establishing a strong foundation for future accelerated growth Testing of products in India Historically our Precision Engineering division had a complex and fragmented structure which has impeded its growth. Over the last two years a great deal of work has been undertaken to resolve some of the fundamental issues and today the division s structure is simpler and, as a result, the way it operates is more efficient and effective. During 2016 our Fix8 programme, an initiative specifically focused on reducing complexity and improving market competitiveness, delivered material benefits including a significantly streamlined product offering. Work continues to further rationalise the product portfolio with a view to offering customers better solutions delivered by fewer products. In-line with our strategy to simplify the business and ensure that we have the most efficient platform for future growth, the division undertook an extensive review of its operational footprint. The review named Project Janus is now being split into two phases. The implementation of Phase 1 has already begun and involves those projects that can be executed quickly and with the least disruption to our business. This includes a structured programme of cost reductions, insourcing to increase machining capacity utilisation, simplification of the organisational structure and further leverage of our low cost European manufacturing operations. A second phase is contingent on market conditions and anticipates potentially substantial and more complex changes, particularly in areas such as Commercial Vehicle, where significant new project quotation activity exists. All of these actions will help to protect operating margins and improve our competitive position in what remains an uncertain market environment.

19 Annual Report and Accounts First assessment (average 37%) % score Year-end assessment score (average 59%) 2015 Year-end assessment score (average 72%) 2016 Year-end assessment score (average 76%) 2017 Year-end target (average 79%) Site key: 1 IMI Hydronic Poland 2 IMI Hydronic Slovenia 3 IMI Hydronic Germany Introduction 90 4 IMI Hydronic Switzerland 80 5 IMI Hydronic North America 6 IMI Hydronic Sweden Site Accelerating operational excellence, further enhancing competitiveness Greater efficiencies ensure increased capacity to keep up with higher customer demands Strategic Review Corporate Governance Financial Statements Lean operating principles are now firmly embedded across the Hydronic Engineering division and the commercial benefits of these activities are becoming increasingly apparent. The division s Olkusz plant was the first of our Group operations to achieve world-class lean status and during the year our Slovenian facility was awarded this status with a score of 88%. To further enhance competitiveness we continue to focus on delivering operational improvements and during the year, a new integrated IT system was installed, on time and to budget, at the Olkusz plant and across a large part of Hydronic Engineering s Swiss based business. During the course of 2017, these new systems will be introduced across the entire division to further embed common ways of working and accurate data collection, all of which will make our businesses more efficient and competitive. Improvements in lean have helped Hydronic Engineering get their products faster onto the shelves of wholesalers

20 18 IMI plc Strategic growth priorities Increasing investment in new product development Having successfully established the new systems and disciplines essential to effective new product development including advanced product quality planning ( APQP ), rigorous competitor product tear-down and Value Engineering all three divisions are increasingly delivering on our promise to introduce great new products and solutions for our customers, more quickly and more effectively than ever before. Continuing to innovate to secure leadership position To maintain our market leading positions and reputation for engineering expertise, our product offering must respond to changing market dynamics so that at all times we provide customers with the best competitive solution that meets their current requirements. As the leading supplier of valves to the liquefied natural gas ( LNG ) sector, we are well positioned to identify developing trends and anticipate likely changes in customer demand. In particular, impacted by the oil price decline and following a period of rapid growth when a number of sizeable LNG plants using large valves were constructed, it was clear that customer requirements would change as they looked to build smaller and more cost efficient plants. In response, our product development teams created a new lightweight valve which has a computationally optimised profile, replacing the previous valve s heavier and more expensive body. This new spherical profile optimises the design of the valve, reduces its weight and improves performance without compromising its strength or durability. Case studies on-line Assembly of metal on metal seated, triple offset butterfly valves

21 Annual Report and Accounts Using the new robust product development processes now embedded across the Group, our product development activities made great progress in the year. For the first time in a decade, we are ready to launch a new platform Precision Engineering product offering which will underpin growth in the years to come. Currently the new development pipeline includes a range of products, that will be launched in April 2017 at Hannover Messe, the world leading industrial technology trade fair. Included in the new product offering is an enhanced range of compressed air preparation units, which clean compressed air in production processes and help prevent damage to machines and costly production shutdowns. This enhanced product range, while retaining the original range s renowned robust characteristics, is lighter and smaller, easier to install and maintain and also offers a number of new safety features. Case studies on-line Building a sustainable competitive advantage Enhancing our competitiveness by offering compelling solutions To drive competitive advantage and market leading positions we must offer customers cutting edge products and technologies that solve their engineering challenges in the most efficient and environmentally sustainable way. Hydronic Engineering was the first of our divisions to bring new products to market with the launch of 14 new products in 2014 and 15 new products in During the year, new product development momentum has been maintained largely through the advanced product quality process which involves the systematic tear-down of competitor products. During 2016, Hydronic Engineering further broadened its customer offering with the launch of another 15 new products. These include an innovative dirt separator, G-Force, which quickly and effectively removes dirt from water-based heating systems, eliminating the risk of damage or shut downs. The G-Force incorporates highly efficient cyclonic technology, which cleans heating and cooling systems up to nine times more efficiently than any other dirt separator on the market. It is also the only dirt separator on the market with flexible installation positions which are of great benefit to customers if space is a challenge during installation. These new product launches will make an important contribution to the division s growth. Introduction Strategic Review Corporate Governance Financial Statements Case studies on-line

22 20 IMI plc Strategic growth priorities Expanding our addressable markets through targeted acquisitions We will supplement our organic growth initiatives with targeted acquisitions, capable of producing returns in excess of the Group s weighted average cost of capital within three years. Beyond our existing business portfolio, we have identified the potential to double the Group s addressable market by making acquisitions in adjacent non-valve product markets. Criteria for such acquisitions include a focus on North American revenues, strong aftermarket dynamics and critical products that create significant barriers to entry. Our process and approach The M&A function forms an integral part of our strategic planning process, working closely with the divisions to support their strategies and evaluate potential acquisitions and partners for the future. The processes involved have improved considerably and are now much more effective at identifying opportunities with regards to geographic, market, product and cultural suitability as well as commercial logic and financial impact. Overall, these enhancements have driven a reduction in the number of opportunities assessed, whilst significantly increasing their quality. This much more focused approach has also enabled us to spend more time developing important relationships with companies, leaving us well positioned to efficiently execute a transaction, whenever the time is right. Broadening the acquisition universe Potential to double addressable market Leverage existing positions in attractive end-markets Non-valve related products and businesses Our acquisition strategies for the divisions are: Within Critical Engineering, bolt-on acquisitions to extend both our product range of semi-severe and configured products and our geographic footprint in both our existing and adjacent markets remain our focus. Opportunities with attractive aftermarkets are always important, but particularly given recent market conditions. We remain pleased with the acquisition of IMI Bopp & Reuther, which has helped us address a number of our strategic objectives. The business is now fully integrated into IMI Critical Engineering and provided a vital foundation to consolidating Critical Engineering s global Nuclear Power business into its Mannheim facility. Precision Engineering continues to simplify its organisation, implementing robust systems and lean improvements, while developing a list of value enhancing potential acquisitions. At the same time, the Precision Executive, supported by the IMI Business Development team, are building senior level relationships in readiness for both large and small scale acquisitions. Our product strategy is well underway in Hydronic Engineering, as we start to focus on high quality well run European acquisition opportunities. We have developed a well-defined pipeline of opportunities, many of which are family owned which would fit well with IMI s culture, whilst enabling us to leverage their strong brands and management capabilities. Geographies North America Europe Latin America Asia Market dynamics Aftermarket >30% Growth rate >5% pa Customer intimacy Products Barriers to entry Criticality of application Predictable aftermarket

23 Annual Report and Accounts An engineer checks the measurements of a component at IMI Precision Engineering s factory in Queretaro, Mexico Introduction Strategic Review Corporate Governance Financial Statements

24 22 IMI plc Operational review IMI Critical Engineering IMI Critical Engineering is a world-leading provider of flow control solutions that enable vital energy and process industries to operate safely, cleanly, reliably and more efficiently. Revenue 651m Operating profit 81.8m *organic Key achievements Down 7%* Down 24%* Value Engineering initiative helped to secure 80m of new orders Introduced 23 new products Rationalisation programme delivered on-time and on-budget with 12m profit benefit On-time and on-budget ERP implementation at four sites Increased average lean score to 62% Successful consolidation of three sites into new world-class facility in China Sale of loss-making Italian service business Performance Full year order intake at 614m (2015: 619m) was 11% lower on an organic basis, after adjusting for disposals and exchange rate movements. In the second half, order intake was 7% below the same period in In the year, as predicted, new construction Oil & Gas intake was 13% lower resulting from reduced LNG orders, following the peak in new project activity in Significant improvements were evident in both midstream, where a large Kazakhstan order was booked in the year, and in HIPPS, where a 15m order was booked in the second half. New construction Fossil Power orders were 23% lower due to reduced activity levels, particularly in the Middle East and Asia. Significant orders were also awarded in Petrochemical where full year order input was 2% higher, including a strong performance in the first half of the year. Aftermarket orders were 6% lower when compared to 2015 with a return to 2015 levels in the second half of the year. In the full year, Oil & Gas was 11% lower reflecting reduced parts activity in the upstream sector which offset good growth in our downstream activities. Lower levels of spend, particularly in North America, resulted in a 13% reduction in Fossil Power while Nuclear Aftermarket increased 36%, reflecting a substantial Korean order in the fourth quarter. After adjusting for 77m of exchange rate benefit and 6m from prior year disposals, revenues of 651m (2015: 631m) were 7% lower on an organic basis and 3% higher on a reported basis. Segmental operating profit of 82m (2015: 93m) was 12% lower on a reported basis and 24% lower on an organic basis. Reflecting the impact of lower volumes, margins were 12.6% against 14.8% in The division s Value Engineering initiative continued to have a significant positive impact and contributed to 80m of new bookings in an increasingly competitive market environment. Value Engineering and improved project management activities helped deliver a year-end order book of 486m at broadly equivalent margins to the prior year. Lean scores also improved significantly to 62% against 56% at the year-end in Outlook Based on the current order book and market outlook, we expect first half organic revenues to reflect a similar percentage reduction to the first half of 2016 with margins broadly similar to the first half of last year. Results for the full year are expected to include a second half bias reflecting the timing of restructuring benefits and normal trading seasonality. IMI Critical Engineering Website During a year when the market was challenging, IMI Critical Engineering made further important improvements in its competitiveness and manufacturing footprint. We also accelerated our Value Engineering and new product programmes, significantly increasing the value proposition for our customers while improving our order intake. Roy Twite Divisional Managing Director

25 Annual Report and Accounts Introduction During 2016, we significantly enhanced our Value Engineering skills and capability and won new orders totalling 80m as a direct result of our new improved levels of competitiveness. Despite the tough market conditions, these new orders were secured at margin levels in line with our historic average while still delivering, on average, a 15% cost reduction for our customers. Value Engineering, which covers all aspects of design and manufacture, systematically reviews every aspect of a product and its production process to make it more efficient and cost effective, without affecting product functionality. As a result, we are able to deliver cost competitive solutions to our customers while still preserving our margins. The use of Value Engineering has also enabled us to access a number of new lower-priced markets with our world-class valve technologies at now acceptable margins. The contract wins Value Engineering has helped us to secure include: a 5.6m order to supply valves and attemperators, which control heat and steam to NEM Energy B.V. a world leading supplier of heat recovery steam generators to the power generation sector; a 15m contract for a semi-severe choke valve for installation in a large Middle East oil company s gas development, which will extract gas from one of the world s biggest sour carbonate gas reservoirs for use in power generation and the chemical industry; and a 15m contract to supply a High Integrity Pressure Protection System for installation in the Middle East which will be used to protect a pipeline and process plant from the danger of over pressure and also to reduce gas emissions into the atmosphere. Enhancing our competitive advantage Strategic Review Corporate Governance Financial Statements Close collaboration with customers, engineers and operations has helped drive Value Engineering progress

26 24 IMI plc Operational review IMI Precision Engineering IMI Precision Engineering is a world leader in motion and fluid control technologies wherever precision, speed and reliability of process are essential. We deliver integrated solutions which improve the productivity and efficiency of our customers equipment. Revenue 708m Operating profit 118.5m *organic Key Achievements Down 3%* Down 10%* Successfully developed first new platform products for launch in 2017 Improved operational performance resulted in new Commercial Vehicle opportunities Launched innovative IMI Norgren Express App 22% reduction in scrap costs Seven day improvement in inventory turns Janus Phase 1 now being implemented IMI Precision Engineering Website Performance After adjusting for 72m of exchange rate benefit and 1m from prior year disposals, revenues of 708m (2015: 662m) were 3% lower on an organic basis and 7% higher on a reported basis. Industrial Automation revenues were 1% lower principally driven by a small decline in Europe which offset broadly equivalent revenues in the balance of our core markets. The revenue profile in the year included a 5% pick-up in the final quarter providing early indications of a potential, so far unconfirmed, improvement in the sector. In the year, Commercial Vehicle sales were 9% lower reflecting a 22% decline in North America due to lower truck production in that region. European Commercial Vehicle revenues were broadly consistent with the prior year whilst Asia improved. Energy sales continued to be impacted by lower investment and were 7% lower than 2015 while Life Sciences and Rail were broadly equivalent to Segmental operating profit of 119m (2015: 118m) was 1% higher on a reported basis and, after adjusting for 13m of exchange rate benefit and disposals, 10% lower on an organic basis. Operating margins of 16.7% compared to 17.8% in 2015 and reflected the impact of lower overhead recoveries following weaker market conditions and investment to support long-term growth. Our detailed review of the Industrial Automation market and its various subsectors confirmed that we have excellent market positions with a valuable installed base and high margin aftermarket and identified those sub-sectors and products that would provide us with the greatest opportunity for growth. In response, the division has embarked on a significant programme of new product development with the first of our great new products due to launch in the first half of This review also formed the basis for a structured programme of reorganisation, including Janus, to capitalise on the most significant opportunities. The successful implementation of lean throughout the division has continued to make excellent progress with the score increasing to 66% against 59% at the 2015 year-end. The impact of lean was clearly evident in the results with improved productivity, a 22% reduction in scrap costs and a seven day improvement in inventory days in the year. Outlook The global industrial outlook remains mixed albeit with some leading indicators and improved fourth quarter sales providing a more positive backdrop for Industrial Automation in the year ahead. We remain cautious given the considerable economic, political and industry uncertainty that remains across many markets and geographies. We expect the European heavy truck and North American Class 8 volumes to soften in 2017 which, when combined with the conclusion of 13m of Commercial Vehicle contracts, will result in lower revenues in the year ahead. Based on current market conditions, we expect first half organic revenues to be slightly lower than the first half of Excluding the 4m benefit from 2016 property disposals, margins will be comparable to the first half of last year. While markets remain uncertain, the benefits of further restructuring activities and new product launches are expected to deliver broadly equivalent margins for the full year. At IMI Precision Engineering we made further significant progress on a number of strategic initiatives in the year, continuing to improve operational performance through the application of lean, re-organising the business to be even more customer-focused and preparing for some important new product launches for 2017 and beyond. Massimo Grassi Divisional Managing Director

27 Annual Report and Accounts Introduction A significant proportion of Precision Engineering s revenue is generated by aftermarket sales. To maintain our strong existing market positions, and to increase the rate at which we convert competitor s products into our own, a number of new initiatives were launched to enhance the customer service experience. A particularly innovative initiative is the IMI Norgren Express App, which enables customers using their smartphone, to quickly find and buy replacement parts, including the replacement of competitors products. All a customer has to do is scan the required part and they will receive full details of the product and its price on the IMI Norgren Express website, enabling them to purchase the product immediately. If the part number or data matrix is not visible, or the part to be replaced is a competitor s product, using the App, the customer can simply photograph the part and, within 30 minutes, they will be sent relevant replacement details or compatible options. The App also provides information about the required part s availability within the distributor network, allowing the customer to find the closest local stockist. Following the IMI Norgren Express App s launch in November 2016, customer reaction has been extremely positive. Driving the aftermarket through innovative sales channel Strategic Review Corporate Performance Governance Review Financial Statements The new, unique IMI Norgren Express App enables maintenance engineers to find and buy replacement pneumatic products fast

28 26 IMI plc Operational review IMI Hydronic Engineering IMI Hydronic Engineering is the leading global provider and recognised expert in hydronic distribution systems and room temperature control, with experience in more than 100,000 construction projects world-wide. Revenue 290m Operating profit 51.9m *organic Key achievements Down 1%* Down 10%* 19% of revenue from products launched in the last three years Two substantial over-the-counter sales contracts signed Successful Product Development momentum building sustainable competitive advantage Refurbishment of foundry in Germany significantly reduces scrap Lean score increased to 76% IMI Hydronic Engineering Website Performance Revenues on a reported basis of 290m (2015: 264m) were 10% higher than 2015 and after adjusting for 30m of exchange rate benefit, were 1% lower on an organic basis. While warmer weather impacted the heating season in the division s largest European markets, revenues in that region were marginally higher than the previous year. Due to project delays, sales in China were significantly reduced in the first half before recovering with positive momentum in the final quarter of the year. North American sales reflected an overall increase of 6% in the year. Segmental operating profit of 52m (2015: 52m) was equivalent on a reported basis and, after adjusting for 6m of exchange rate benefit, 10% lower on an organic basis. As expected, operating margins showed a second half seasonal improvement to 19.4% while full year margins at 17.9% (2015: 19.6%) were lower than the prior year reflecting the impact of lower volumes and the on-going investment in great new products and operational excellence. New products launched in the last three years continued to have an important, positive impact on the results and generated 55m of sales in the year. Included in the 2016 product launches were a number of products specifically targeted at the development of the division s over-the-counter sales strategy, which resulted in two significant new agreements being signed in Europe. These agreements, while having relatively modest impact on the 2016 results, are expected to underpin increased trading in future years. The previously announced entry into the actuator market, with TA-Slider, has received an excellent market reception and 2017 plans include further product launches. The division s lean scores continued to improve and increased to 76% against 72% at year-end In the year, Hydronic Engineering s Polish operations, the Group s highest lean scoring plant, successfully launched the division s standard J D Edwards ERP system. This system is now providing increased efficiencies and forms the foundations for future ERP roll-outs across the division. Also in 2016, the division s largest manufacturing plant, in Germany, undertook a total refurbishment of its foundry facilities resulting in a significant reduction in scrap and work in progress. Outlook While the European construction markets are forecast to remain subdued, the success of new products and over-thecounter sales are expected to result in organic revenue growth in the year, albeit weighted to the second half. Operating margins are also expected to show their normal second half improvement and will include the benefits of restructuring. As well as delivering another great performance in the application of lean and maintaining strong momentum in new product development, at IMI Hydronic Engineering we also made good progress with a new over-the-counter sales strategy, successfully re-opening an important market segment for the business. Peter Spencer Divisional Managing Director

29 Annual Report and Accounts Introduction To support our significant new product offering and our strengthened over-thecounter sales strategy, we have revitalised our sales and marketing activities within the division. At the heart of our new approach is our sales team, who have dedicated roles and responsibilities tailored to meet the specific needs of our wholesale and project based customers to ensure that at all times an optimum customer experience is delivered. Feedback to date has been very positive, as evidenced by improved Net Promoter Scores ( NPS ) which measure customers satisfaction. In particular, NPS feedback indicates that 86% of our customers rank Hydronic Engineering as a true innovator. In addition to creating a dedicated specialist sales force to drive our new over-the-counter sales strategy, we have reviewed how best our products should be merchandised within wholesalers and new and attractive packaging has been created to maximise the profile of the product in crowded retail environments. To coincide with the development of our new product pipeline we have also significantly increased our digital marketing activities. Today, every new product launch has its own bespoke digital campaign which delivers far greater exposure for less cost and provides a more effective platform to showcase our product technologies and engage with our customers. Revitalising our sales and marketing activities to drive revenue Strategic Review Corporate Governance Financial Statements In addition to Hydronic Engineering s great new products, packaging and installation support materials are customer driven from the start

30 28 IMI plc Corporate responsibility Our approach Our ambition is for IMI to become a truly great company that is preferred by all its stakeholders because of our market leading products and services and the way we operate all aspects of our business. We achieve this by maintaining a long-term focus, investing in our future and at all times operating our business in an ethical and responsible way. This approach is fundamental to delivering sustainable profitable growth. Mark Selway Chief Executive IMI Critical Engineers are world-class, solving customers major challenges

31 Annual Report and Accounts Our people Geoff Tranfield Group Human Resources Director Introduction We employ some 11,000 people around the world. On a daily basis they are tasked with delivering our strategy and the progress IMI has made this year is down to their hard work. To ensure that this progress continues, we must continue to attract and retain good people, ensure we have relevant skills and leadership capabilities across the Group and foster a positive working environment which provides our people with development and engagement opportunities. Shaping our culture - The IMI Way At the heart of making IMI a great company are our values and behaviours which, in conjunction with the launch of our new strategy, were refreshed and rolled out across the Group in These values and behaviours, which help shape our culture and outline the standards and conduct everyone in the Group should comply with, are integral to The IMI Way which defines how we do business. Reviewed and endorsed by the Board our IMI values and behaviours are now embedded in all aspects of our business including our recruitment and induction processes, our bi-annual management performance assessments and our succession planning. As outlined on page 11 of this Strategic Report, connecting and collaborating with colleagues across the Group to share best practice and establish consistent Group-wide standards and process is one of our key enablers helping us deliver our strategic plan. This way of working, which is improving our competitiveness and profitability, is becoming common practice across IMI. Collaborative projects undertaken during the year included:- Precision Engineering s enhanced range of compressed air preparation units have been developed in conjunction with our Hydronic Engineering division. The range incorporates one of Hydronic Engineering s new world-class ball valve designs, which provides excellent value for money, great performance and is perfectly matched to the needs of our Precision Engineering customers. In addition, the new product offering is manufactured on a new automated assembly system, developed, designed and built by Hydronic s Polish-based assembly system supplier, which has resulted in reduced costs and lead times. This new product range enhances Precision Engineering s customer offering and creates a new market for one of Hydronic Engineering s existing products; the transfer of specialist value engineering resource and skills from Precision Engineering to Critical Engineering has enhanced Critical Engineering s world class capabilities and has helped the division win new orders in excess of 80 million at our historic margin levels while still delivering, on average, a 20% cost reduction for our customers. Our mindset Engineering GREAT together Behaviours: Strategic Review Corporate Governance Financial Statements Connect Learn Improve Deliver Lead

32 30 IMI plc Corporate responsibility Our people (cont d) Our work environment In addition to reinforcing the IMI values and behaviours across our business we are committed to ensuring that all employees and workers are treated fairly in an environment which is free from any form of discrimination with regard to the nine protected characteristics outlined in the Equality Act 2010, which are age, religion, race, sex, disability, gender reassignment, marriage/civil partnership, pregnancy and maternity and sexual orientation. Further detail about our Diversity and Inclusion Policy, which was revised in 2014, is set out below in the paragraph titled Diversity and Inclusion. The IMI Code It is essential that we run our business in an ethical way with the highest standards of integrity. As part of their induction, every employee who joins the Group receives training in relation to our Code of Conduct (the Code ), which covers antibribery, anti-corruption and fair market competition. Refresher training on the Code is provided regularly as appropriate and is reinforced through face-to-face sessions at the annual IMI Way Day. During the year Code training was enhanced by the introduction of a number of e-learning programmes which utilise the Group s global intranet that employees, regardless of location, are able to access. In April we ran a Group-wide e-learning module focused specifically on anti-bribery and anticorruption. The module was completed across our businesses within six weeks. In October, as part of our supplier evaluation process, all our purchasing teams participated in an e-learning programme to raise awareness of slavery and human trafficking to ensure neither take place in either our own or our suppliers businesses. We encourage all employees to report to their manager any incident that is not in keeping with the IMI values and behaviours. We also operate a confidential independent compliance hotline in more than 20 languages which employees can use to report issues anonymously. Hotline activity is reviewed on a monthly basis by the Group s Ethics and Compliance Committee, which I chair, and all reports are investigated thoroughly and, where required, appropriate action is taken to resolve issues quickly. During cases were reported via the hotline which compared to 97 in 2015 and 103 in Community activities Consistent with our values we believe we have a responsibility to the communities around the world in which we operate. In addition to creating jobs and investing in our local communities, each year employees across the Group participate in what has become known as The IMI Way Day during which they receive faceto-face refresher training on both The IMI Way and the Code and spend time supporting a local community charity or project. As well as being the right thing to do, these initiatives contribute to the local community, help build trust and reinforce our team building and collaborative approach. Some of the local charities our employees supported during the 2016 IMI Way Day included: A group of our graduates receive a tour of Hydronic Engineering s facility in Poland a charity that provides food to families on low incomes in and around Selangor, Malaysia; a home for the terminally ill in Bangalore and Sai Kripa, a charitable organisation which provides food, shelter and education for homeless and orphan children in India; Newlands Bishop Farm near Solihull that provides opportunities for people with learning disabilities and mental health problems to learn work-based skills, in the UK; a school for disabled children in Bad Oeynhausen, Germany; and a rehabilitation centre for recovering alcoholics in Paju, South Korea. Code on-line Colleagues from Critical Engineering and Precision Engineering collaborate during The IMI Way Day Employees from IMI Buschjost support a local school for children and young adults with disabilities at their sportsday Employees receive face-to-face training on The IMI Way Day at Hydronic Engineering s facility in Brazil

33 Annual Report and Accounts I joined IMI in 2015 after I graduated from The University of Nottingham with a BEng (Hons) Mechanical Engineering degree. Previously I had done an internship at IMI s business in Bristol working within the Research & Development (R&D) team, where I had the opportunity to see first-hand how the graduate scheme operated. In particular, I was attracted by the scheme s focus on development and the chance to gain experience in diverse aspects of the business through different placements. Currently I am in the middle of my third of four six month placements in a Project Management role within the Global Procurement team, where I am working on a number of supplier monitoring tools including a procurement dashboard and supplier scorecard. During my previous placements I was part of the Operations team in Precision s UK Poole based business, where I focused on implementing a new system to improve efficiency and reduce downtimes on machines, and before that I worked at Precision s business in Leeds in the R&D function where we carried out competitor product tear-downs and I was part of the team developing concept designs for a next-generation product. Sinneli Jayampathy IMI Precision Engineering Attracting good people Recruitment Our performance and our ability to execute our strategy is dependent on recruiting the best people with the most relevant skills and experience who are aligned with our values and behaviours and our strategic ambition. During the year we continued to improve our recruitment processes. In particular our graduate programme, which was refreshed at the beginning of 2015, continued to go from strength to strength as we recruited twice as many graduates in 2016 (31) compared to 2014 (15). Diversity and Inclusion At IMI we believe it is essential that we employ and retain the very best people to serve our global business and our diverse customer base. In 2015, a revised Diversity and Inclusion Policy was embedded in the recruitment and other human resource processes and procedures that we operate across the Group. By applying this policy, we aim to recruit the best people to execute our strategic priorities and to Gender mix across the Group All employees Female Female % Male Male % 3,157 27% 8,575 73% Managers % % Senior managers Board directors % % 2 22% 7 78% reflect the location of our operations, customers and markets. Additionally, when creating shortlists for internal and external vacancies, we insist that external recruiters take account of our policy and, as part of our internal management performance process, each Divisional Managing Director is set objectives aimed at improving diversity in their division. These objectives include an ambition to recruit local talent and during 2016 much progress was made in this area. By way of example, at the end of December 2014 across the Group, 32 of our management or senior technical roles were undertaken by expatriate employees on secondment from their home country. Today only 11 of these positions are undertaken by expatriates who have returned to roles in their home countries and have been replaced by talent developed or recruited locally. During 2016 our approach to diversity and inclusion was further embedded by the addition of a number of diversity awareness training programmes. Our leadership development programme, Leading the Way to Engineering GREAT, includes a session on diversity and inclusion and we have piloted a standalone e-learning programme on diversity, which employees can access via our global intranet. Introduction Strategic Review Corporate Governance Financial Statements A group of 2015 intake graduates undertake a mock lean audit at Hydronic Engineering s facility in Poland as part of their development workshop

34 32 IMI plc Corporate responsibility Our people (cont d) IMI s 2016 graduate intake during their two week induction at HQ Developing our people Development programmes To achieve our strategy we must continue to ensure that our employees have the relevant business and leadership capabilities. In 2016 around 100 people participated in our Leading the way to engineering Great programme, which is focused on our senior management team and potential future leaders. In addition, across the Group, 200 people joined our Being a Great IMI Manager development programme which is targeted at employees who have recently been promoted to a management role. The programme s two and a half day training course was run in China, the Czech Republic, Germany, the UK and the US and, in 2017, the programme will be further extended to include Italy, Poland and Sweden. IMI Learn, our e-learning platform which is hosted on our global intranet, was launched in February and during 2016 over 8,000 employees around the Group participated in e-learning modules on a wide range of business specific topics as well as training in relation to anti-bribery and anti-corruption and diversity and inclusion, both of which are highlighted above. Our Operations Fast Track programme, which runs for 12 months and covers both professional and personal development, was first launched in our Hydronic Engineering division in April 2015 and has continued to be rolled-out across the division during the year. The programme focuses on our next generation of managers and its main objective is to accelerate their development and create internal succession candidates. When I joined Operations Fast Track I was assigned a mentor, Hydronic Engineering s, Operations Director, who has provided advice and support to me throughout the programme. In addition to improving my technical capabilities, I have had the opportunity to improve my people management skills and the programme has also accelerated my personal development, including presentation techniques and language skills. My three month secondment to Hydronic s Operations team in Sweden, where I headed-up the production department, provided great insight into another part of the Hydronic division and also helped me to further develop my leadership skills. Felix Bömer Hydronic Engineering - Value Stream Leader, Globo and Special Valves, Germany

35 Annual Report and Accounts When I graduated from Inha University in South Korea, I was attracted by IMI Critical Engineering s graduate programme, primarily because it offered practical engineering experience and the opportunity to work in different geographic locations. The programme s induction and training workshop, which all new graduates participate in, was extremely helpful. It provided a good insight into IMI and its business and it enabled all the graduates to get to know each other and build a network which is very active. I am now at the start of my second placement, based in California at IMI CCI RSM, working as a Project Engineer on new design modifications for our customers in the fossil power and LNG sectors. Prior to that I was a Design Engineer in IMI CCI Korea involved in the development of a number of products which are now in their manufacturing phase which is very exciting to see. To date, the graduate programme has provided me with the practical engineering experience I had hoped for. Learning new things while working on live projects can be challenging, but I am surrounded by colleagues who are always willing to help, give advice and share their knowledge. JiEun Kim IMI Critical Engineering During a week of development activities for our 2015 intake of graduates, one of IMI Precision Engineering s current graduates presents his most recent project to his peers in the Czech Republic Succession planning During the year as part of the talent and succession process, we again undertook an extensive review of our management succession plans to ensure that we have strength and depth of leadership talent across the Group. The performance of our managers was assessed against a number of criteria including leadership skills, values and behaviours and their business s performance. The findings of this process have been used to build individual development plans and inform our future planning, thereby ensuring that we have a pipeline of high calibre talent throughout the Group. Engaging our people At IMI we also recognise that we must retain good people. In addition to the development opportunities outlined above, providing a positive working environment which enables our employees to understand the contribution they make and be fully engaged is key to our success. The global intranet has been instrumental in keeping employees informed and connected across the Group and it has also facilitated crossbusiness collaboration and the sharing of best practice. In terms of face-to-face engagement our annual Group and divisional conferences, which involve our top 350 managers, serve as a catalyst to cascade information across our businesses and all management who attend are required to share conference key messages with their broader teams. The Group s financial results, strategic progress and important initiatives in areas such as health and safety are communicated through a number of mechanisms including regular town hall meetings. We also work with our European Works Council, covering 11 countries across Europe, to further encourage effective employee communication and engagement. Twice a year we publish our cross divisional magazine, the IMI Eye, which features news stories generated by our businesses around the world and is distributed in multiple languages to employees and key stakeholders. We gather feedback from employees annually. This takes the form of a survey that is completed at the end of the IMI Way Day and covers a number of key areas. All survey feedback is reviewed and areas where understanding needs to be improved or potential concerns are identified and further investigated via a pulse survey (a quick and effective real time survey that gathers further detail) in the relevant part of the business. If required, based on the pulse data information, appropriate actions are put in place to resolve issues and clarify understanding. Introduction Strategic Review Corporate Governance Financial Statements

36 34 IMI plc Corporate responsibility Our operations and products Health & Safety The health and safety of our employees and the health and safety of our other stakeholders, including our customers and suppliers, is paramount. This unconditional commitment to health and safety is also consistent with our strategy to significantly improve the operational performance and the efficiency of our businesses. By prioritising health and safety and reducing the occurrence of incidents, we will also minimise the time spent investigating issues, reduce the amount of time lost to absence and sick leave and save on legal, insurance and medical costs. Our ambition is to achieve world-class health and safety performance. To ensure that we realise this, we have embedded a proactive continuous improvement approach to health and safety across our entire organisation and during the year we made significant progress. The number of Lost Time Accidents significantly reduced in 2016 (15 in 2016 compared to 31 in 2015) and a number of our facilities have recorded significant periods of zero Lost Time Accidents, including IMI CCI Korea in our Critical Engineering division, which in July 2016 marked 2,000 days without a Lost Time Accident. Our proactive approach to health and safety, which is aimed at continuously improving the identification and remediation of safety weaknesses in our processes and procedures and the removal of potential hazards in our facilities, covers all operations and all levels of management and includes: a rigorous bi-annual assessment of the ten operational and safety areas we consider most important in order to keep our employees free from harm and our operations effective and efficient. This assessment process, which is combined with the bi-annual lean benchmarking reviews (further details Early in 2016, IMI CCI Korea celebrated 2,000 days with no lost time accidents The ten attributes of safety - fourth round assessment average HSE scores by division Signage Capability Management Tool Provision & Care IMI Critical Engineering IMI Precision Engineering IMI Hydronic Engineering World-class Contractors & Site Systems Risk Assessment NEEDS WORK IMPROVING Accident Investigation MAX Machinery & Guarding Performance Tracking Environmental Protection

37 Annual Report and Accounts Machine assisted welding provides additional safety for our employees of which are set out on pages 14 to 17), is undertaken by specialist health and safety experts in each operating unit which drives greater ownership of the process and ensures that health and safety is embedded in each business. Each local assessment is then independently reviewed by one of the Group or Divisional Health and Safety champions and a combined Lean-HSE report is produced which measures progress since the last assessment, identifies potential hazards, recommends remedial actions and targets further overall improvements. All assessments are posted on the Group intranet which ensures performance is visible and facilitates the sharing of best practice across all of our businesses. In addition, the combined Lean-HSE reports are analysed to identify any commonly recurring Group-wide hazards which require specific remedial action. During the year this analysis, combined with scrutiny of our accident reports, Product testing at Precision Engineering s facility in Shanghai, China confirmed the need to reinforce our efforts on hand injuries and in response, a Group-wide campaign focusing specifically on hand safety was launched recently; real time monitoring of our health and safety performance: during the year the Group enhanced our HSE 360 IT system which operates in all our facilities to track any and every incident which requires first aid or any other medical intervention. In addition, in the case of an incident requiring more than first aid treatment, a report is issued to the relevant divisional management team and a remediation plan is agreed and implemented; and regular health and safety training for all employees: every employee who joins IMI receives relevant health and safety training as part of their induction and where appropriate, participates in further on-site training focused on hazard identification, risk assessment and action planning. In addition, site management is responsible for detailed health and safety Gemba Walks, (a lean manufacturing term used to describe the personal observation of work which involves a detailed physical review of the factory to observe and identify real time potential hazards and risks). This, in addition to our bi-annual assessment process described above, has made a measurable impact on both our Lean-HSE scores and accident reduction. Introduction Strategic Review Corporate Governance Financial Statements

38 36 IMI plc Corporate responsibility Our operations and products (cont d) IMI Hydronic Engineering uses paints which are water based or free of volatile organic compounds on all its pressurisation vessels to ensure minimal impact on the environment and a healthy working environment for our employees Our operations We have a responsibility to minimise the environmental impact of our day-to-day operations. Given the nature of our production processes, our main focus is on energy efficiency. Historically we have regularly conducted internal reviews of our energy usage. In 2015, in accordance with the European Union Energy Directive, we augmented this process by undertaking independent energy assessment surveys across our major European operations. Data and recommendations from these surveys were collated and fed into our Group-wide energy efficiency programme that was developed and rolled out during the course of the year. This programme has delivered a number of efficiency improvements including: Precision Engineering s Fellbach facility in Germany installed a new boiler for their heating system that is estimated will achieve annual savings of some 300 tonnes of CO2 and 100,000; and IMI CCI s Brno plant in the Czech Republic and IMI Truflo Marine s operation in Birmingham, England, upgraded lighting and lighting controls and are anticipating a combined 300 tonne reduction in CO2 emissions each year, with an investment payback on these improvements in under two years. During the year we continued to make good progress to reduce our CO2e emissions. In 2015 we set our minimum baseline performance at 61,250 tonnes and during 2016, we reduced this further by 2%. In keeping with our continuous improvement culture, we will look to deliver further reductions year on year. Employees at Precision Engineering s facility in Shanghai, China, inspect a pneumatic manifold for a customer As detailed on pages 14 to 17, we have made significant progress in improving the operational efficiency of our facilities through the application of lean processes. A key part of the lean process is the elimination of waste and during the year, the improvement in the Group s inventory turns has freed up 9.6m in cash.

39 Annual Report and Accounts Our products We design and manufacture products that help our customers operate their systems and processes safely, cleanly and cost effectively. We also sell products that directly help to tackle some of the biggest issues facing the world today including global warming and resource scarcity. High Integrity Pressure Protection Systems (HIPPS), designed by our Critical Engineering division, and installed in pipelines and processing plants, control the build-up of fluid and gas pressure in the system and ensure safe operation whilst avoiding harmful emissions being released into the atmosphere. We continuously look at our products to see how they can better satisfy customer needs The new IMI Maxseal solenoid valve, designed and produced by our Precision Engineering division, for a wide range of Oil & Gas applications, uses less power helping customers save energy without sacrificing reliability or performance. Eclipse, the thermostatic radiator valve, designed and manufactured by our Hydronic Engineering division, delivers a constant room temperature which enhances the efficiency of the heating system and saves on energy costs. Collapsible handrail, actuated with pneumatic cylinders. Courtesy of Booth Engineering HIPPS unit, designed by IMI CCI, provides the highest safety levels and zero emissions Introduction Strategic Review Corporate Governance Financial Statements

40 38 IMI plc Measurements and targets Business performance is measured through Group-wide targets and improvement measures. Each IMI business participates in an annual round of planning meetings with the Executive Committee, during which performance and future plans for that business are reviewed and updated. These business plans have all been aligned with the Group s strategy. The Key Performance Indicators ( KPIs ) set out below represent the financial and non-financial targets which are integral to the delivery of the Group s strategy. Organic revenue growth Segmental operating profit % 6 Millions % 0-5% -5% m 239.4m 227.7m Organic revenue growth excludes the impact of acquisitions, disposals and foreign exchange movements. The revenues from acquisitions are only included in the current year for the period during which the revenues were also included in the prior period. In 2016, the Group s continuing businesses experienced a drop in organic revenue of 5%. In 2016, Group segmental operating profit was 228m compared to 239m representing a reduction of 5% on a reported basis. On an organic basis, after adjusting for the favourable impact of exchange rates and acquisitions and disposals, segmental operating profit was lower by 17%.

41 Annual Report and Accounts Introduction Lost time accident rate The health and safety of all our employees remains paramount. We measure our progress in this area by tracking our >1 day lost time accident frequency rate ( LTA rate ). In 2016, our LTA rate improved relative to Our work to reduce workplace hazards and integrate health and safety audits with the Group lean audit programme in 2016 had a very positive impact on our performance. Lean assessment % During the year we continued to improve our lean scores and moved closer towards achieving Group-wide worldclass operational performance. Our highest score is now 94% and the average has increased from 31% when we first benchmarked the business in 2014 to 66% in the year-end 2016 assessment process. Return on capital employed % % 59% 66% 18.3% 14.3% 12.5% Year-end 2014 Year-end 2015 Year-end Return on capital employed ( ROCE ) is defined as segmental operating profit after tax divided by capital employed. In 2016 ROCE was 12.5% which compares to 14.3% in 2015 and reflects the reduced operating profit impacted by market headwinds. Strategic Review Corporate Governance Financial Statements

42 40 IMI plc Principal risks and uncertainties Our risk management processes were significantly updated in 2015 and are now well embedded in all our businesses. These processes identify, evaluate and manage the risks which could impact the performance or reputation of IMI and its ability to implement its growth strategy. The Board determines the Group s risk appetite and reviews the Group s risks formally throughout the year. Responsibility for implementing and monitoring internal controls and other elements of risk management, is delegated to the Group Chief Executive and the Executive Committee. The Executive Committee operates alongside the Audit Committee, which has primary responsibility for oversight of financial controls, the Nominations Committee, which has primary responsibility for succession risk, and the Remuneration Committee which has primary responsibility for remuneration and incentive structure risk. Risk appetite The Board is responsible for determining the nature and extent of the principal risks it is prepared to accept to achieve the Group s strategic objectives. Specific risk exposures and appetites vary according to the nature of the risk, including the organisation s ability to mitigate its impact. Details on risk appetite are communicated to the Divisional Managing Directors and the Group s Executive Committee to ensure that decision making and behaviours across the business are consistent with the guidance set by the Board. Risk management Risk appetite Prudent Balanced Receptive Financial risk Compliance risk Operational risk Strategic risk The risk management processes we operate ensure that we have a common, Group-wide approach to the identification, assessment and quantification of risks and the way in which they are managed, mitigated and monitored. Monitor improvement actions and report Assess if further controls are required and initiate improvement actions Identify and assess the risks Identify existing mitigating actions and controls Identify monitors to confirm controls are operating effectively Our risk management processes are embedded in all parts of our operations and our bottom up risk management framework, which is described below, ensures that the Board and the senior leadership team is able to actively assess risks and monitor the measures used to mitigate, transfer or avoid such risks. All of the Group s manufacturing operations are required to maintain an up-to-date risk profile which identifies the key risks facing the business, assesses the mitigating processes and controls in place to manage the risk and monitors and measures the effectiveness of those controls. The risk profile enables management to identify issues and areas that require improvement and to efficiently develop remediation action plans. During the year, the formality and rigour of risk assessment within our manufacturing businesses was enhanced principally through incorporating it into each business monthly management reporting procedures. This monthly review increases management ownership and accountability, both of which are crucial to ensuring an effective risk management framework. Bi-annually each manufacturing operation uploads its risk profile to the Group intranet. Each of our three divisions review and consolidate their most significant site level risks and mitigation strategies into a summarised divisional risk profile, which includes any additional divisional level risks as appropriate. The divisional risk profiles are then consolidated into a single Group risk profile using the same methodology. Both the divisional and Group risk profiles are presented and reviewed by the Executive Committee twice a year. The Executive Committee s review, which includes a detailed analysis of the Group risk profile, the supporting divisional summaries and actions undertaken to ensure compliance with the enhanced requirements of the UK Corporate Governance Code, are all submitted to the Board. The key strategic, operational, financial and compliance risks facing the Group, in order of priority, are shown in the table on the following pages. This analysis includes why we think the risk is important, how we are mitigating the risk, our perception of whether the risk has increased or not, and the main changes during In addition to strategic, operational and compliance risks, the Group is also exposed to broader financial market risks, in particular, currency exchange rate volatility following the Brexit referendum. A description of these risks and our centralised approach to managing them is described in Section 4.4 of the financial statements.

43 Annual Report and Accounts RISK RISK DESCRIPTION AND POTENTIAL IMPACT MITIGATION MACRO-ECONOMIC INSTABILITY GLOBAL ECONOMIC OR POLITICAL INSTABILITY IMPACTING THE GROUP S ABILITY TO ACHIEVE FORECAST AND MARKET EXPECTATIONS RISK MOVEMENT CHANGES DURING 2016 MAJOR PROJECT IMPLEMENTATION FAILURE TO DELIVER MAJOR TRANSFORMATIONAL PROJECTS ON TIME AND ON BUDGET RISK MOVEMENT CHANGES DURING 2016 PRODUCT QUALITY QUALITY ISSUES LEADING TO PRODUCT FAILURE, RECALL, WARRANTY ISSUES, INJURY, DAMAGE OR DISRUPTION TO CUSTOMERS BUSINESS RISK MOVEMENT CHANGES DURING 2016 The Group operates in global markets and demand for our products is dependent on economic and sector-facing environments. A downturn in a global / regional economy or political instability could impact endmarket demand and the Group s ability to achieve market expectations. The risks associated with Brexit are not considered as material to the Group. Economic and market conditions have remained challenging throughout Critical Engineering experienced reduced activity in Oil & Gas and Power generation as the effects of the low oil price continue to impact these and related sectors. Precision Engineering was affected by lower demand in Europe and Asia for Industrial Automation and the Commercial Vehicle market was significantly down in the Americas. The Group has continued to increase investment in new product development, enhanced operational performance and increased value engineering initiatives to improve competitiveness. To mitigate the impact of current market weakness, all three divisions have implemented significant cost-reduction programmes which will be executed in the early part of The Group is undertaking a number of major change projects to adjust to the changing economic conditions including: business reorganisations and implementation of new IT systems. Failure to deliver the desired objectives on time and on budget and failure to react quickly enough to changing market conditions, could have an adverse financial impact on the Group. In response to adverse market developments, the Group continues to execute major change projects relating to business reorganisations. The continued ERP investment programme will also see a number of complex IT system implementations. All significant projects during 2016 have received substantial senior management oversight in the form of bi-weekly Executive project reviews to ensure they are appropriately resourced and remain on track to deliver the objectives that were approved at project initiation. The Group s investment in innovative engineering solutions will continue to be a priority across all three divisions. The quality and safety of our products is of the highest importance and failure to deliver the quality required would result in negative financial and reputational impact. Divisional management monitor key customers and respond quickly to changes in customer demand. Our core forecasting process utilises early indications of reduced demand and ensures operational output can be right sized appropriately. The Group operates across a range of regional markets and our strategy is to ensure that we have a balanced portfolio with no single dependency on a single market sector or geography. Enhanced stress testing and sensitivity analysis of business plans with regular reviews of key market and sector metrics. Increased investment in new product development, enhanced operation performance to improve competitiveness. Continued management of resources to execute projects. Detailed plans with clear and measurable milestones reviewed by the Divisional Managing Directors to track progress. Regular review of major project progress by the Executive Committee. Enhanced risk assessment process including full mitigation action plans for all major change projects. Specialist IT and Group Assurance reviews of major IT projects. Detailed contingency plans. Adherence to Group-wide standard for Advanced Product Quality Planning process (APQP). Continued focus on quality management systems, including audits to appropriate quality standards. Testing of finished product and customer sign off on the most critical of products. Targeted lean events to improve quality and application of problem solving tools. Upgrade of talent and focus on excellence in quality and product development. The Group has continued to implement lean manufacturing methodology to improve how we create value, reduce waste and improve performance. Lean assessments continue to show significant improvements in In order to extend the benefits of sharing Group-wide best practice, management have instigated a combined metric which consists of the lean assessment, the Health, Safety and Environment assessment and five key performance indicators: cost of quality, on time delivery, productivity, inventory turns and Lost Time Accidents. In addition, the APQP process introduced in 2015 now underpins new product development across all divisions and manufacturing operations. Introduction Strategic Review Corporate Governance Financial Statements ACQUISITION RISK FAILURE TO INTEGRATE ACQUISITIONS SUCCESSFULLY AND DELIVER THE REQUIRED SYNERGIES RISK MOVEMENT An integral part of the Group s strategy is to make value enhancing acquisitions that complement our product portfolio. Failure to deliver the post integration strategy would reduce the value of acquired businesses. Central M&A function, suitably resourced, working with divisions to identify hard and soft synergies within targeted acquisition opportunities. Formalised acquisition approval, due diligence and post-acquisition integration processes. Documented process and toolkit to monitor and effectively manage 100 days post-acquisition integration. CHANGES DURING 2016 The revised and formalised integration process used in the acquisition of Bopp & Reuther has been further enhanced. This process results in a mix of divisional and Group resources being assigned to ensure the right skills and people across all disciplines are available to successfully project manage acquisition integration.

44 42 IMI plc Principal risks and uncertainties (cont d) RISK RISK DESCRIPTION AND POTENTIAL IMPACT MITIGATION REGULATORY BREACH FAILURE TO COMPLY WITH LEGISLATION OR A BREACH OF OUR OWN HIGH STANDARDS OF ETHICAL BEHAVIOUR RISK MOVEMENT IMI has established a framework which instigates the highest standards to ethics and regulatory compliance across our business. As we expand our operations to achieve growth it is important that we maintain these standards. Legislative requirements around tax, anti-bribery, fraud and competition law require rigorous monitoring and training to avoid financial and reputational damage. Commitment to good governance practices which are embodied in the IMI Way. Continued enhancement of the internal controls declaration process and continued rigorous financial audits by our Group Assurance team. The annual IMI Way Day was held in June across the Group and included ethics training for all employees. Policies, manuals and guidelines are available to all employees under the legal, compliance and financial sections of the IMI global intranet. Group, division and specific territory resources dedicated to legal and regulatory compliance. Training of employees focusing on how to apply the IMI Way in everyday situations and key risk areas such as competition law, fraud and antibribery and corruption. The confidential IMI hotline to report concerns. Group standard operating procedures are available on the intranet and increased rigour around core legal and compliance processes. Third party agent due diligence and approval procedures, standard agency agreements and terminated non-compliant agents. CHANGES DURING 2016 IMI has a zero appetite for compliance risk and the challenging market and regulatory environment demands the very highest standards of conduct. Our processes and procedures have continued to strengthen and embed throughout the business. During 2016 we trained over half our workforce on anti-bribery and a third of our employees on competition law using elearning modules hosted on our new IMI Learn platform. This system provides the ability to target particular employee groups and tracks completion of required compliance training. The introduction of stringent new procedures and processes to operate in high risk territories ensures compliance when we address future business opportunities in these regions. SUPPLY CHAIN FAILURE TO MANAGE THE SUPPLY CHAIN RISK MOVEMENT The Group has a significant number of contracts with a broad base of suppliers. Failure to meet customers requirements in respect of quality or delivery, could have a material impact on the Group s results. Monitoring of risks and development of contingency plans to mitigate the impact of a supplier failure or increased prices. Preferred supplier lists for all major materials and components in each of the divisions. Adequate safety stock and/or dual supply for critical components. Supplier scorecard process to monitor performance, capability and resilience. CHANGES DURING 2016 The implementation of a supply scorecard. The supplier risk assessment selection tool and introduction of commodity experts, has resulted in a reduction in the likelihood of a critical, strategic supplier failure. Preferred suppliers lists have been produced to concentrate strategic purchasing with certified and approved suppliers. Framework agreements have been introduced to increase formality in standard purchase agreements. CYBER SECURITY UNAUTHORISED ACCESS TO OUR IT SYSTEMS RISK MOVEMENT Unapproved access to IT systems could result in loss of intellectual property, fraudulent activity, theft and business interruption. IT Security Improvement programme underway across the Group. IT security steering group comprising representatives from all divisions with corporate sponsorship and oversight. Cyber security awareness training for all employees, particularly with regard to fraud. Disaster recovery plans instigated on all critical IT assets. CHANGES DURING 2016 The Group is in the second year of a three year Group-wide Security Improvement Programme and during 2016, a 24/7 security operation centre was established to monitor and resolve security incidents. The programme includes deployment of consistent anti-virus, firewalls, intruder detection, device control and encryption software across the Group. Combined with greater cyber risk awareness and behaviours from our employees, these developments have helped mitigate the increasing cyber threat to a level consistent with 2015.

45 Annual Report and Accounts RISK RISK DESCRIPTION AND POTENTIAL IMPACT MITIGATION COMPETITIVE MARKETS INCREASINGLY COMPETITIVE MARKETS LEADING TO PRICING PRESSURES OR LOSS OF CUSTOMERS RISK MOVEMENT CHANGES DURING 2016 NEW PRODUCT DEVELOPMENT RISK MOVEMENT CHANGES DURING 2016 Increased volatility and slowdown in major economies could result in increased competition, leading to loss of customers and/or pricing pressures leading to lost sales and reduced profits. Improvements in operational capabilities, routine tear-down testing and competitive benchmarking of competitor products in all three divisions has underpinned new product development and value engineering initiatives. These procedures have proved crucial success factors in winning business, particularly in the Critical Engineering division. The APQP process is also producing tangible benefits across the Group following its successful introduction in The Group s strategy for sustainable long-term growth will be achieved in part by delivering a pipeline of innovative new products. Failure to deliver market leading products will impact our ability to grow. Competitor tear-down and value engineering procedures. Review of site capacity as part of the lean benchmarking to better utilise facilities and improve productivity. Standard costings to ensure thorough understanding of product cost. Monitoring of markets to ensure cost competitiveness and market shares. Formal market, competitor and peer reviews undertaken quarterly. Five year technology roadmaps included in divisional strategies. Continued investment in research and development to ensure we target the most profitable opportunities. Centres of design and technological excellence established with dedicated teams to monitor progress. New product introduction procedures in place. Tracking of key performance metrics level of sales from new products and level of research and development spend against sales. The APQP process launched in 2015 is now operating effectively across all three divisions. Hydronic Engineering, the division which pioneered the process, continued to benefit from the pipeline of new products, generating 30m of sales in 2016 ( 30m in 2015). New product development is now an integral component of the five year strategic planning cycle and establishes commercial priorities and development roadmaps for all the Group s principal markets. Introduction Strategic Review Corporate Governance Financial Statements

46 44 Corporate Governance 46 The Board 48 Letter from the Chairman 49 Corporate Governance Report 55 Audit Committee Report 58 Nominations Committee Report 59 Directors Remuneration Report Engineering GREAT the IMI Way A Life Sciences customer in India uses Precision Engineering s products in a medical device

47 Annual Report and Accounts Introduction Strategic Review Corporate Governance Financial Statements

48 46 IMI plc Board of Directors Lord Smith of Kelvin Chairman Mark Selway Chief Executive Roy Twite Executive Director Daniel Shook Finance Director Bob Stack Senior independent non-executive director Nationality British Australian British American British American Committee membership Nominations Committee Chair Executive Committee Executive Committee Executive Committee Nominations Committee Remuneration Committee Chair Date of appointment Expertise Significant UK and international board experience Extensive knowledge of both engineering and manufacturing Strong track record in private equity, mergers and acquisitions Specialist capability in finance Experienced and proven Chief Executive Solid track record running international engineering businesses In-depth knowledge of relevant end-markets including oil & gas, energy and automotive Proven organisational and engineering expertise Management capability having run all of IMI s divisions Extensive knowledge of endmarkets and customer base Extensive financial management experience Extensive knowledge of complex process manufacturing across a range of industrial sectors Strong international perspective, having worked in a number of key geographies during his time with two leading global businesses Experienced non-executive director at public company level Significant international business experience Specialist capability in human resources, organisational change and corporate affairs Key external appointments Non-executive Chairman of Alliance Trust plc Non-executive Chairman of the UK Green Investment Bank plc Non-executive director of Halma plc Non-executive director of the Earthwatch Institute Non-executive director of Signet Jewellers Limited Board experience International business responsibility 90% Engineering 70% Public company board 70%

49 Annual Report and Accounts Introduction Carl-Peter Forster Non-executive director Birgit Nørgaard Non-executive director Ross McInnes Non-executive director Isobel Sharp Non-executive director Nationality German Committee membership Audit Committee Nominations Committee Remuneration Committee Key external appointments Non-executive director of Geely Automobile Holdings, Hong Kong Chairman of London Taxi Company Non-executive director of Volvo Cars Corporation, Gothenburg, Sweden Chairman of Chemring Group plc Danish Audit Committee Nominations Committee Remuneration Committee Non-executive director of DSV A/S Non-executive director of WSP Global Inc. and Chairman of the Governance, Ethics and Compliance Committee Non-executive director of Cobham plc French Australian Audit Committee Chair Nominations Committee Date of appointment Expertise Experienced international business leader In-depth knowledge of the automotive sector Expert in operational excellence and lean manufacturing Significant experience in technology management Experienced non-executive Held senior executive positions in engineering consultancy Wide ranging sectoral experience including energy, water, infrastructure and building industries Experience in strategy as well as finance and accounting Considerable financial expertise Significant knowledge and experience of working in large international companies that operate in global markets Non-executive Chairman of Safran SA Non-executive director and Chairman of the Audit Committee at Faurecia SA Non-executive director and Chairman of the Audit Committee at Eutelsat Communications SA British Audit Committee Nominations Committee Considerable accounting, audit, governance and transactions experience including time as the Senior Technical Partner at Deloitte in London, President of the Institute of Chartered Accountants of Scotland and membership of the UK Accounting Standards Board and the Financial Review Panel Non-executive director of the UK Green Investment Bank plc Non-executive director and Audit Committee Chair of Winton Group Limited Honorary Professor at Edinburgh University Business School Strategic Review Corporate Governance Financial Statements Finance 70% Regulatory & legal 60% Mergers & acquisitions 80% Find out more about the Board on-line

50 48 IMI plc Corporate Governance introduction Chairman s Governance letter Lord Smith of Kelvin Chairman Dear Shareholder Strong governance is of great importance to me and my fellow directors. We firmly believe it makes a real difference to Board effectiveness, underpins a healthy culture and contributes to IMI s sustainable success. In the Corporate Governance Report on pages 49 to 54 of this Annual Report, we describe our governance practices and the workings of the Board and its committees. Compliance with the 2014 UK Corporate Governance Code I am pleased to report that IMI complied with the 2014 UK Corporate Governance Code (the Code ) throughout the year. Further details of how we comply with the Code are provided in the Corporate Governance Report. In keeping with our Group-wide focus on continuous improvement, during 2016 the Company s Corporate Governance Framework (the Governance Framework ), which incorporates the vital elements of our Board level governance arrangements, was reviewed and refreshed. Changes to the Governance Framework included updating the remits of each of the Board s committees and refining the matters reserved to the Board. The Governance Framework appears on the IMI website Leadership During my second year as Chairman, the various changes made to the Board and the Executive during 2015 have been bedded in. Our non-executive directors are making a positive contribution and the dialogue with Management is open and transparent. As a result we enjoy a good quality of discussion at meetings. Through regular contact between formal meetings, I have developed a strong working relationship with the Chief Executive and Mark and I enjoy frank, constructive and suitably challenging debates. Culture In 2014 the Board adopted a clear set of values which flow through all parts of IMI and are reflected in the culture and behaviours of our people across the Group. These values, which are key to the delivery of our strategy, inform all our operational processes. They are also built into our people development programmes and are assessed bi-annually as part of the staff performance review process. Further information about our values and behaviours is detailed in the Corporate Responsibility section on pages 28 to 37. Strategy and familiarisation During the year we dedicated more time as a Board to reviewing the detailed implementation of our strategy, which we reaffirmed at our strategy day in September We visited two of our major facilities in Germany and our largest UK manufacturing operation. In addition, several of the non-executive directors and I attended the Group management conference and we have all visited sites on an individual basis. This direct contact with the Group s businesses is critically important as it accelerates our understanding of IMI s operations and helps us get to know the wider management team. It also allows us to see the great work our people do on a daily basis which is clearly evident in the operational improvements we are seeing across the Group. Strengthening IMI As highlighted in my statement on page 1, through effective execution of our strategy we continue to see significant improvements being made across the Group and as a result IMI is becoming a stronger company. Progress is being made in all parts of the Group and across all functions. In particular, our financial controls have been further strengthened and I am pleased to report that the level of control effectiveness across the Group remains high. Another area where we have seen good progress is in relation to succession planning, which is key to IMI s long-term success. As described in the Corporate Responsibility section on pages 28 to 37, during the year we undertook an extensive review of management succession planning which involved an assessment of the Group s top 230 leaders. I am pleased with the significant progress being made towards building a pipeline of high calibre management talent. I enjoy engagement with shareholders and appreciate the support shown by our institutional shareholders. I look forward to meeting shareholders again at our Annual General Meeting. Yours faithfully Lord Smith of Kelvin Chairman 23 February 2017

51 Annual Report and Accounts Corporate Governance Report Set out below is the Board s formal report on corporate governance and separate reports from the Audit, Nominations and Remuneration Committees. UK Corporate Governance Code - Compliance statement The Board is committed to maintaining high standards of corporate governance and confirms that throughout the year-ending 31 December 2016 the Company has applied the principles of good governance contained in the 2014 UK Corporate Governance Code (the Code ) and complied with its best practice provisions. Further details appear below, and in the Directors Report and other cross-referenced sections of this Annual Report, all of which are incorporated by reference into this report. There are no provisions in respect of which an explanation is needed under the comply or explain requirement. A description of the main features of the Company s internal control system and disclosures on other regulatory matters including statements on going concern and viability can be found on pages 132 to 135 in the Directors Report. A summary of our risk management systems and information about the risks and uncertainties that relate to our business is detailed within the Principal Risks and Uncertainties section on pages 40 to 43. Information on corporate responsibility can be found in the Corporate Responsibility section on pages 28 to 37. The Board Composition Throughout 2016 and to date in 2017, the Board comprised nine directors: the Chairman; the Chief Executive; five independent non-executive directors; the Finance Director and one operational executive director. In line with the Code, all continuing directors submit themselves for election or re-election at each Annual General Meeting. The role of the Board and the clear division of responsibilities between the Chairman and the Chief Executive are outlined in the Directors Report on pages 132 to 135. Independence of non-executive directors The Board considers that all five non-executive directors are free from any business or other relationship which could materially interfere with the exercise of their independent judgement and all meet the criteria for independence under the Code. Isobel Sharp is a co-director with Lord Smith on the board of the UK Green Investment Bank plc, a government owned financial institution. Cross-directorships are recognised in the Code as a potential consideration in relation to the assessment of independence. The Board has considered the circumstances and regards Isobel and all of the other nonexecutive directors as independent. The Chairman was also regarded as independent at the date of his appointment to the Board. Board diversity The non-executive directors are a diverse group from different backgrounds and nationalities and bring with them a wide range of skills and experience in commerce, finance and industry in various parts of the world. There are six nationalities on the Board and two of the nine directors are female (i.e. 22%). Our approach to diversity is set out in more detail in the Corporate Responsibility section on pages 28 to 37 and in the Nominations Committee Report on page Executive directors 5 Independent non-executive directors Dates of appointment Under the Code, the Chairman is excluded when considering the independent nonexecutive composition of the Board. Name Date of appointment Date of current letter of appointment Anticipated expiry of current term Carl-Peter Forster 1 October January September 2018 Ross McInnes 1 October January September 2017 Birgit Nørgaard 6 November January November 2018 Isobel Sharp 1 September January August 2018 Lord Robert Smith 7 May January May 2018 Bob Stack 13 June January June 2017 Meetings and use of Board time The Board met on six occasions during the year including two results reporting meetings, a day dedicated to strategy discussions and regular review meetings. In addition, there were several days spent on group site visits to three operating units. Introduction Strategic Review Corporate Governance Financial Statements

52 50 IMI plc Corporate Governance Report (cont d) Board activity Highlights of Board activity in the year were: Bedding in the Board and Executive membership following various changes during 2015 Reaffirming the commitment to the strategy Overseeing progress with growth and process investments - Continuing growth investments made in new products and business IT systems - Driving core process disciplines including lean, risk, compliance, advanced product quality planning and policy deployment Approval and review of strategy implementation including - Manufacturing transfers in IMI Critical Engineering - Adopting a new organisation structure in IMI Precision Engineering - Reviewing the go to market strategy in IMI Precision Engineering - New product introductions in IMI Hydronic Engineering Overseeing risk and the continuing actions to strengthen the internal control environment Reviewing talent and succession management and the continued embedding of our people development processes including succession plans, talent programmes and improvements in management capability Board attendance Director Board meetings % attended where eligible Carl-Peter Forster 6/6 100 Ross McInnes 6/6 100 Birgit Nørgaard 6/6 100 Isobel Sharp 6/6 100 Lord Smith 6/6 100 Bob Stack 6/6 100 Mark Selway 6/6 100 Daniel Shook 6/6 100 Roy Twite (i) 4/6 67 Board roles and reserved matters A description of Board roles and reserved matters is included in the Governance Framework and summarised in the Directors Report on pages 132 to 135. Induction and continuing development programme A formal induction process for new non-executive directors is well established and is the responsibility of the Chairman with support from the Chief Executive and Company Secretary. Business familiarisation is at the core of induction and continuing development for non-executive directors at IMI and is based around gaining an understanding of the business and getting to know the wider management team. In addition all non-executive directors attend a corporate induction day for senior managers held at head office. There is also a committee induction process designed to brief new committee members on the relevant committee s activity and the issues it faces. Non-executive directors are required to visit business units around the Group and to meet face-to-face with senior operating management and key corporate staff. Non-executive directors continue to become familiar with the businesses after induction and there is regular contact between management and nonexecutive directors during site visits, formal meetings and events. During 2016 all of the non-executive directors made site visits and the whole Board spent several days in Germany, where they visited sites in both IMI Precision Engineering and IMI Hydronic Engineering. There was also a visit to the Group s largest UK operation. Appropriate coaching and access to training and other continuing professional development is available to all non-executive directors and appropriate updates are given during the year at Board and committee meetings. Special governance and regulatory refresher sessions were held during the year and were attended by all of the non-executive directors. In 2016, these included update sessions for all three of the standing committees and governance updates for the Board which covered the EU Market Abuse Regulation and other developments. (i) Roy Twite did not participate in two meetings due to attendance at a leadership and strategic development programme at the Company s request. In 2017 to date the Board has met once with all members in attendance.

53 Annual Report and Accounts Introduction Strategic Review Corporate Governance Financial Statements The Board receive a tour of two manufacturing sites in Germany; (top) IMI Buschjost, Precision Engineering and (bottom) IMI Heimeier, Hydronic Engineering

54 52 IMI plc Corporate Governance Report (cont d) Board visits to IMI Buschjost and IMI Heimeier in Germany IMI has a substantial presence in Germany which is home to business units in all three divisions and IMI s largest European market. In October the Board visited Germany where it held meetings and visited two outstanding manufacturing sites, one in Precision Engineering, IMI Buschjost, and the other in Hydronic Engineering, IMI Heimeier. IMI Buschjost is a key brand for Precision Engineering and offers a comprehensive range of valves ideally suited to the process industry including solenoid valves, angle-seat valves, motorised valves and systems for dust filters. IMI Heimeier is a key brand for Hydronic Engineering and offers thermostatic radiator valves, actuators and room thermostats. During the factory tours, the engineers and machine operators had the opportunity to showcase new product development and operational improvements. Local and divisional management made business presentations and after the site visits they enjoyed dinner with the Board. The Board commended the investment in lean improvement, new products and innovation and the high standards of operational management. IMI s core processes were seen to be well embedded at each site. The Board was very impressed with both businesses and congratulated local management for the progress being made. Site visits are an important, regular feature of the Board calendar. Such visits provide an excellent opportunity for the Board to meet a wider group of employees and gain a more in-depth understanding of the business. The Board with members of IMI Buschjost s management team Board evaluation In 2016 an internal evaluation exercise was carried out through questionnaires and canvassing comments from directors. The Board received the findings of the internal evaluation in December 2016 and relevant elements were shared with the committees. While the findings of the internal evaluation were overwhelmingly positive, in keeping with the Group s commitment to continuous improvement, the Board agreed that some areas should be further developed over the coming year, including changes to the order of meetings. Action taken in response to the internal evaluation undertaken in 2015 included the appointment of all non-executive directors to the Nominations Committee and subsequent training on best practice for the expanded Nominations Committee. The Board reviewed effectiveness, taking account of the Financial Reporting Council s best practice guidance on board effectiveness, and the directors confirmed that the Board is fulfilling its responsibilities appropriately and that the Board and its committees were effective. Evaluations of individual Board directors were also undertaken to assess whether each continuing director has demonstrated an effective contribution and commitment to the role. The Chairman fed back to individual directors the relevant findings. As senior independent director, Bob Stack conducted a review of the Chairman with the other non-executive directors and shared the results with the Chairman. During the year the Chairman also met with the non-executive directors to review the performance of the Chief Executive. The Chairman passed on to the Chief Executive appropriate feedback from the review of his performance. In line with the Code, the Board has agreed that the Chairman will arrange an externally facilitated evaluation process every three years and the next such process will be conducted in 2017 facilitated by Egon Zehnder. Standing committees of the Board The standing committees of the Board are the Audit Committee, the Nominations Committee and the Remuneration Committee. Each of these committees operates under written terms of reference which clearly set out their respective delegated responsibilities and authorities. The full terms of reference of these committees are part of the Governance Framework. The committees report to the Board on their work, normally through their respective chair, following each meeting. Separate reports from the committees appear in this Annual Report as follows: Audit Committee Report on pages 55 to 57; Nominations Committee Report on page 58 and Remuneration Committee Report on pages 59 to 71.

55 Annual Report and Accounts Audit Committee Nominations Committee Remuneration Committee Ross McInnes Chairman Membership: Carl-Peter Forster Birgit Nørgaard Isobel Sharp Main responsibilities: Financial reporting Oversight role in relation to financial statements Reviewing significant areas of judgement and accounting policies Reviewing the proposed statements on going concern and viability to appear in the Annual Report Advising the Board on whether the draft Annual Report is fair, balanced and understandable Monitoring announcements in respect of financial performance Financial control and risk Reviewing the effectiveness of internal financial controls Reviewing financial risk including fraud risk Oversight of internal audit Managing the external audit process, its objectivity, effectiveness and cost Appointment of the auditor and responsibility for the audit fee Reviewing the system for confidential whistleblowing and the treatment of reports received Lord Smith of Kelvin Chairman Membership: Carl-Peter Forster Ross McInnes Birgit Nørgaard Isobel Sharp Bob Stack Main responsibilities: Board and committee composition Succession plans for the Board and for senior management and corporate roles Search for and recommendation of candidates for appointment as non-executive directors, Chief Executive and other executive director positions Diversity policy and monitoring of progress Review and recommendation of proposals for the assignment of major executive responsibilities and the appointment and removal of divisional business leaders Bob Stack Chairman Membership: Carl-Peter Forster Birgit Nørgaard Main responsibilities: Define and recommend the remuneration policy Determine the individual remuneration packages for the most senior executives and the Chairman within the policy approved by shareholders Set annual and long-term incentive metrics and awards and determine the outcomes Report on remuneration matters and constructively engage with shareholders Assess risk in respect of remuneration and incentive structures in particular Introduction Strategic Review Corporate Governance Financial Statements

56 54 IMI plc Corporate Governance Report (cont d) Executive Committee The Executive Committee is chaired by the Chief Executive and the other members are shown on page 9. Regular attendees include the Head of Group Finance, Director of Risk and Compliance, and the Head of Investor Relations. Other senior executives and line managers from around the Group are regularly called upon to attend meetings of the Executive Committee. The Committee meets monthly and more often as may be required. The Executive Committee is the senior Management body and as part of the broad remit set by the Chief Executive it monitors and manages business performance, reviews progress against strategic objectives and considers divisional management issues. It also formulates budgets and proposals on strategy, policy and resource allocation for consideration by the Board. The Executive Committee is a Management committee which takes its authority from the Chief Executive and is not a committee of the Board. The Executive Committee plays a key part in risk assessment, risk management and monitoring processes and receives regular reports on health and safety, compliance, legal and corporate affairs. In addition to the Annual Report, the Company issues preliminary results and interim results announcements, as well as two interim management statements between results announcements. The IMI website includes recordings of certain key presentations made by senior Management, recent annual and interim reports, interim management statements, other corporate announcements and links to the websites of the Group s businesses. The Company has arranged a dealing service for the convenience of shareholders with Equiniti (details are shown on page 156). A sponsored Level 1 American Depositary Receipt programme has been established for which Citibank, N.A. acts as depositary (details can be found on page 156). By order of the Board John O Shea Group Legal Director and Company Secretary 23 February 2017 Investor relations The Board as a whole seeks to maintain a balanced understanding of the issues and concerns of major shareholders and to assist them in the stewardship of their investments. The Chief Executive and Finance Director have primary responsibility at Board level for investor relations and they, and the Head of Investor Relations, report to the Board on shareholder issues at every Board meeting during the year. Financial analysts notes are circulated to the directors and the Board receives regular feedback reports from the Company s brokers and public relations advisers as well as from Management. Dialogue is maintained with shareholders and the executive directors meet regularly with institutional investors: during 2016 there were over 130 such meetings with institutional shareholders. The Chairman and the senior independent director also are available to shareholders as needed and both have had contact with investors during the year. The 2016 Annual General Meeting was presided over by the Chairman and attended by all of the directors. The Chairman encouraged debate and questions at the formal meeting and the directors met shareholders informally afterwards. Each substantively separate issue was put to the Annual General Meeting as an individual motion. A resolution for the approval of the Directors Remuneration Report was also put to the meeting. Notice of the Annual General Meeting was issued more than twenty working days in advance and the level of votes lodged for and against each resolution, together with details of abstentions are shown on the IMI website. The Board values the support of shareholders and the poll results for all resolutions proposed at the Annual General Meeting were well above 90% in favour in each case.

57 Annual Report and Accounts Audit Committee Report Dear Shareholder I am pleased to present my third report as Chairman of the Audit Committee. This report is intended to give an account of the Committee and its activity in support of the Board. The core responsibility of the Committee is oversight in relation to financial reporting, internal financial controls and assurance provided by internal and external audit. Composition of the Audit Committee Birgit Nørgaard, Carl-Peter Forster, Isobel Sharp and I were members of the Audit Committee throughout the year. All of the Committee members are regarded by the Board as independent non-executive directors. I have chaired the Audit Committee since 1 January 2015 and became a member on 1 October I was a career finance director until my retirement from executive office with Safran in 2015 and I have significant recent and relevant financial experience. I also chair the audit committees at two French public companies, Faurecia SA and Eutelsat Communications SA. My colleagues on the Committee have experience at audit committee level and Isobel Sharp is a Chartered Accountant with a strong financial assurance background through her career in audit practice. Together the Committee members have the skills, experience and objectivity to be an effective audit committee and constructively challenge Management. The Committee generally asks the following to join its meetings: the Chairman, the Chief Executive, the Finance Director, the Head of Group Finance, the Director of Risk and Compliance, the Group Assurance Director and the external auditor, EY. I consult with the Finance Director and other key staff and with the external auditor ahead of meetings to ensure issues are well understood and the meeting papers are appropriate. The Committee holds at least part of several meetings each year alone with the external auditor and with the Director of Risk and Compliance and the Group Assurance Director. The Committee has the powers to call on any employees to come before it. The Secretary to the Committee is the Company Secretary, who is also the Group Legal Director. Ross McInnes Chairman of the Audit Committee Main areas of activity The Audit Committee met four times in 2016, including two results reporting meetings and two planning and review meetings. Financial controls continued to be a key focus area for the Committee and Management has continued to make significant progress in strengthening internal financial controls and risk management processes. Based on its review of selected key controls, EY agreed with Management s assessment that the level of control effectiveness at full and specific scope locations remains high at 98%. The IT investment and infrastructure programme will further strengthen the control environment in the years ahead and facilitate efficiency improvements in the audit. The Committee has received reports on the six-monthly Internal Control Declarations which are submitted by each business unit and cover internal controls in relation to financial affairs, IT, human resources and other key areas. The process is managed by Group Assurance, which routinely audits and follows up declarations to review scores and appropriate improvement actions. The Committee s work also included reviewing the financial statements, the effectiveness of internal financial controls and assurance processes and the significant issues of judgement described below. The Committee reviewed and approved for submission to the Board the statements on going concern and viability, which appear in the Directors Report on pages 132 to 135. The Committee remit calls upon it to advise the Board in relation to the fair, balanced and understandable requirements in respect of the Annual Report and the Committee has made a positive report to the Board in this connection. This is also an area for review by the auditor in relation to which it did not report any exceptions. The statement of Directors responsibilities on page 136 includes confirmation by the Board that it considers the report and accounts, taken as a whole, to be fair, balanced and understandable. During the year, the Committee received a technical and governance update covering changes in accounting standards, developments in audit reform and other key topics. Introduction Strategic Review Corporate Governance Financial Statements

58 56 IMI plc Audit Committee Report (cont d) Attendance Director Audit Committee meetings Carl-Peter Forster 4/4 100 Ross McInnes 4/4 100 Birgit Nørgaard 4/4 100 Isobel Sharp 4/4 100 % attended where eligible Oversight of financial reporting The Committee acts in an oversight role in respect of the Annual Report and announcements with financial content all of which are prepared by Management. The Committee received reports on the annual and interim financial statements from Management and the external auditor who presented to its meetings. The auditor s report including a summary of key areas of audit focus is set out on pages 137 to 143. Significant judgements related to the financial statements In preparing the accounts, there are a number of areas requiring the exercise by Management of judgement and estimation. The Committee reviews the most significant accounting areas involving such judgements and estimates and these are described below. Impairment of goodwill and intangibles arising from acquisitions We considered the level of goodwill held on the Group s balance sheet in respect of a number of past acquisitions and whether, given the future prospects of these businesses, the value of goodwill in each case remains appropriate. The Committee reviewed the assumptions and calculations used by Management in the assessment of any impairment of goodwill and intangible assets and agreed that no impairment charges were required save for a 5m charge in respect of Stainless Steel Fasteners Limited. Impairment was also a focus area for EY which reported its findings to the Committee. Section 3.2 to the financial statements on page 97 provides details regarding the Group s intangible assets and goodwill and the impairment charge mentioned above. Revenue recognition The Committee discussed the timing of revenue recognition on some of the Group s larger contracts. In addition, this is an area of audit focus on which EY reported to the Committee. Having reviewed Management s process and EY s report, the Committee concluded that revenues were appropriately reflected in the financial statements. Section 5 note C to the financial statements on page 127 provides further information. The Committee also reviewed Management s assessment of the impact of IFRS 15 Revenue from Contracts with Customers which is discussed further in Section 1 on page 84. Pensions accounting The Committee reviewed the appropriateness of the accounting treatment in respect of pension scheme liabilities, including the actuarial assumptions used and the impact of one-off special pension events. The Committee also reviewed reporting from the external auditor, which concurred with the accounting for pensions as proposed by Management. The Committee supported Management s on-going effort to de-risk its pension obligations. Further details can be found in Section 4.5 on page 114. Inventory valuation The Committee reviewed the judgements applied to standard costing valuations and provisions against excess and obsolete inventory and concurred with Management s assessment. This was another focus area for EY, in respect of which it reported to the Committee that inventory valuation across the Group is considered appropriate. Note to the financial statements on page 96 provides details of inventory valuation. Other judgement areas In addition the Committee reviewed the appropriateness of restructuring costs disclosed as exceptional, property sales and the adequacy of taxation provisions. Further details on these matters can be found in Sections 2.2 and 2.4 respectively. External audit independence and performance review The Committee approved the proposed external audit approach and its scope based on the size and level of risk of the entities concerned. The Committee takes a risk based approach to audit and other assurance activity. The key audit risks identified by EY are set out in its report on page 137 and were reviewed by the Committee in approving the audit scope and plan. The Committee considered the independence and objectivity of the external auditor. In assessing auditor independence the Committee had regard to the Financial Reporting Council s latest best practice guidance for audit committees. In addition, the auditor confirmed that its ethics and independence policies complied with the requirements of the Institute of Chartered Accountants in England and Wales. The policy on the use of the auditor for non-audit work was reviewed and updated by the Committee in 2016 to take account of developments in regulatory requirements and ethical guidelines for the audit profession. The policy requires approval by the Committee for any non-audit engagement which is more than trivial. The Finance Director monitors any proposed non-audit engagement of EY and refers to the Committee for approval as appropriate. The policy does not allow work to be placed with the auditor if it could compromise auditor independence, such as, functioning in the role of management or auditing its own work. Non-audit fees paid to the auditor were 0.2m (2015: 0.2m), which represents 8% of the audit fee and demonstrates the tight control which is maintained in this area. No non-audit engagements involved fees above 30,000 and the main areas of activity were tax compliance and the interim

59 Annual Report and Accounts results review. We are of the view that the level and nature of non-audit work does not compromise the independence of the external auditor. Benchmarking of the audit fee was conducted to ensure that it is appropriate and competitive and the Committee approved the proposed audit fee payable to EY. We formally reviewed the effectiveness of the external audit process. A questionnaire was used to review the external auditor and was completed by each member of the Committee and by the Finance Director. Feedback was also received from the Chief Executive, the Head of Group Finance, Group and Divisional Management. The output from this process was considered by the Committee and was provided to the external auditor. As a result of this exercise the Committee believes the external auditor s performance has been satisfactory and the external auditor is considered to be effective. To further enhance the external audit process, certain improvement actions were identified in the effectiveness review and plans have been put in place by EY to address these. These included a focus on improving continuity of staff and earlier completion of certain locations statutory accounts. Auditor choice, tenure and tendering The Committee recommended and the Board approved the proposal to re-appoint EY as the external auditor at the forthcoming Annual General Meeting. EY was first appointed as auditor for the year-ending 31 December 2009, following a competitive tendering process, after which it replaced the previous auditor. The term of appointment is annual and there are no contractual restrictions on the Committee s choice of auditor. To maintain the objectivity of the audit process, the external audit partner responsible for the Group is rotated within EY at least every five years and the current Senior Statutory Auditor, Andrew Walton, has now been in place for four years and will change following completion of the 2017 audit. Succession planning has been carried out and a new audit partner designate has been approved by the Committee. New regulations for audit tendering and rotation of audit firms have been introduced which require mandatory tendering after ten years (i.e. ahead of the 31 December 2019 audit) and a change of audit firm after 20 years (i.e. ahead of the 31 December 2029 audit). The Committee does not currently intend to do so but reserves the right to run a tender for the audit role at an earlier date if that is right for the Company and otherwise, will conduct a tender by the regulatory deadline. Internal audit The Committee also receives reports from and monitors the work of the internal audit function, known as Group Assurance. Group Assurance reports through the Director of Risk and Compliance to the Chief Executive. Group Assurance also has a direct reporting line to the Committee. Assurance work is primarily directed towards financial control audits but has been broadened into other areas including major business change project planning and implementation and internal control declarations. The principal projects reviewed in 2016 were major computer systems implementations in each of the three divisions. Group Assurance is working closely with the divisions to develop improved monitoring and review processes to complement the internal and external audit coverage. The annual plan and resourcing for internal audit were approved by the Committee and take account of the enhanced monitoring and review activity planned within the divisions. The Committee reviewed the effectiveness of Group Assurance with Management and received input from the external auditor. The Committee was pleased to note the contribution that Group Assurance had made to the further strengthening of internal financial controls during the year. Compliance hotline The Committee reviews the operation of the independent compliance hotline for reporting concerns, oversees the more significant reports received and considers how these are investigated and followed up. We believe that the hotline process and investigations are effective and that proportionate action is taken by Management in response. Committee evaluation The Audit Committee reviewed its own performance and terms of reference and received positive feedback from the evaluation exercise carried out in relation to the Board and each of its standing committees. The Committee approved the foregoing report on its work. Yours faithfully Ross McInnes Chairman of the Audit Committee 23 February 2017 Introduction Strategic Review Corporate Governance Financial Statements

60 58 IMI plc Nominations Committee Report Lord Smith of Kelvin Chairman of the Nominations Committee Dear Shareholder Composition Carl-Peter Forster, Ross McInnes, Birgit Nørgaard, Isobel Sharp, Bob Stack and I were members of the Committee throughout the year. All of the other members of the Committee are regarded as independent non-executive directors. Attendance Director Nominations Committee meetings Carl-Peter Forster 3/3 100 Ross McInnes 3/3 100 Birgit Nørgaard 3/3 100 Isobel Sharp 3/3 100 Lord Smith 3/3 100 Bob Stack 3/3 100 % attended where eligible Main areas of activity in 2016 No new directors have been appointed during the year. All of the directors are recommended for re-election at the 2017 Annual General Meeting. The Board approved all of the recommendations made by the Committee for the renewals of appointment for continuing directors. Other key areas of activity are described below. Succession planning The Committee reviews Board composition and has formulated a structured, medium-term plan for Board succession. During the year we reviewed talent development and succession planning for the top 230 roles in the Group with the support of the Chief Executive and Group Human Resources Director. We were encouraged to see that significant progress continues to be made in terms of cultivating a pipeline of high-calibre talent. Further details of the Management succession planning process are set out in the Corporate Responsibility section on pages 28 to 37. The Committee noted the Financial Reporting Council s 2016 feedback statement on UK Board succession planning as a useful point of reference. Review of time commitments and contributions The appointments of the Chairman and non-executive directors are made on the basis of a formal letter of appointment including a stated minimum time commitment judged appropriate by the Committee. The Committee considers that the time given to IMI by each non-executive director is sufficient. The Board is satisfied that I have the necessary time to devote to my role as Chairman. Diversity The Board recognises the benefits a diverse pool of talent can bring to a boardroom and remains committed to increasing diversity in the businesses by voluntary measures. We will continue to review the composition of our management teams and the Board to ensure that we have the right mix of skills and experience while maintaining our effectiveness and execution capabilities. At Board level, there are six nationalities, two of the five non-executive directors are female and there is a broad mix of backgrounds and experience. Further information on diversity matters is given in the Corporate Responsibility section on pages 28 to 37. Committee evaluation The Nominations Committee reviewed its own performance and terms of reference and received positive feedback from the evaluation exercise carried out in respect of the Board and each of its committees. Following the Board evaluation in 2015, the Committee membership during 2016 has included all of the nonexecutive directors and an update on Nominations Committee best practice was provided for the expanded Committee. The Committee approved the foregoing report on its work. Yours faithfully Lord Smith of Kelvin Chairman of the Nominations Committee 23 February 2017

61 Annual Report and Accounts Directors Remuneration Report Annual Statement from the Chairman of the Committee Introduction Dear Shareholder 2016 was the second year under our remuneration policy following its approval by shareholders in In line with last year s approach and to simplify this year s report, our approved remuneration policy can be found in the 2014 Annual Report on the IMI website. Our focus this year has been twofold: to ensure consistent application of our policy and to ensure remuneration arrangements remain appropriate in light of the continuing tough economic and market conditions has been a challenging year for IMI with continued difficult economic and market conditions putting pressure on the Group s ability to deliver progress in many of the key financial measures. It is pleasing to report that many of the longer term actions have been executed well and the new product pipeline, operational improvements and ERP implementation have all made excellent progress in the year. Group profit before tax has decreased by 5% to 208m while organic revenue was lower by 5% to 1,649m. EPS was also lower by 4% in 2016 and shareholders received a dividend of 38.7p an increase of 1% from last year. Despite the challenges encountered, we remain focused on executing our strategy, investing in the business and capitalising on long-term growth opportunities. In particular, the investments made over the course of 2015 and 2016 give us improved potential to grow shareholder value in the longterm and we remain confident that we are well positioned to capitalise on future market recovery. The Committee believes that the remuneration arrangements in place will continue to support the strategic business plan and ensure a strong focus on growth and efficiency. Bob Stack Chairman of the Remuneration Committee How were pay outcomes linked to performance in 2016? Remuneration for the executive directors is closely tied to business performance, with a high proportion of total remuneration delivered through variable pay linked to our strategic plan. At IMI we remain committed to a pay-forperformance philosophy and as a result of the performance challenges I have outlined, the outcomes under our variable pay schemes are below the on-target level. Annual incentive awards to executive directors for 2016 were based on a combination of Group profit before tax (40%), organic revenue growth (20%), cash conversion (20%) and strategic and personal objectives (20%). Although only threshold levels were achieved in respect of Group profit before tax and organic revenues, above target levels were achieved for cash conversion which together with achievement against strategic and personal objectives resulted in the annual incentive bonus payments, and consequently the single total figure, being marginally higher than last year. The Committee is confident that this represents a fair reflection of performance in the context of the aforementioned challenges faced by the business. Summary outcomes against financial targets are presented in the chart below: Group profit before tax Organic revenue growth Cash conversion 16% Target 39% 82% Maximum Additional to the annual incentive awards is the IMI Incentive Plan, which is further explained on page 66. This plan was only implemented in 2015, the first vesting of the award will be in M W Selway and R M Twite were granted a matching share award and performance award in 2014 and the awards vested at 0% and 0% respectively. Strategic Review Corporate Governance Financial Statements

62 60 IMI plc Directors Remuneration Report Annual Statement from the Chairman of the Committee (cont d) What decisions were made in 2016? The Committee reviewed remuneration arrangements for the executive directors during the year and decided that no change to remuneration policy or to structure in 2016 or 2017 is appropriate or necessary. The Committee reviewed the base salary levels for executive directors in light of 2016 business performance and concluded that an increase of 2%, effective 1 January 2017, was appropriate and in line with the wider employee workforce. The Chairman and non-executive director fees were also reviewed and were increased by 2%, effective 1 January Looking forward The Committee will keep the existing remuneration policy under review to ensure it continues to support IMI s strategic objectives. With this is mind, it is noted that the remuneration policy was last approved by shareholders in 2015 and is due to be reviewed before a policy is put to the 2018 Annual General Meeting. This policy review will be a key area of focus for the Committee ahead of the 2018 Annual General Meeting. Yours faithfully Bob Stack Chairman of the Remuneration Committee 23 February 2017

63 Annual Report and Accounts Directors Remuneration Report Annual Remuneration Report Introduction Introduction The Committee presents the Directors Remuneration Report, which will be put to shareholders for an advisory (non-binding) vote at the Annual General Meeting to be held on 4 May The report includes details of the Committee, the pay received by our executive directors during the year in accordance with our current remuneration policy (approved on 7 May 2015) and comparative internal and external data. The Remuneration Committee ( the Committee ) Composition The members of the Committee throughout the year were Bob Stack (Chairman), Carl-Peter Forster and Birgit Nørgaard. In accordance with the 2014 UK Corporate Governance Code, all of the non-executive directors were regarded by the Board as independent. Responsibility The Committee determines the remuneration policy and rewards for the executive directors and, in his absence, the Chairman. The Committee also reviews the remuneration packages of those at the next most senior level of management and has considered the levels of pay across the broader Group. A copy of the Committee s terms of reference, which are reviewed annually, is included in the IMI Corporate Governance Framework and available in the Corporate Governance section of the IMI website. Internal advisors to the Committee During the year, the Committee consulted the Chief Executive, regarding the packages of the other executive directors and senior managers. It also received support from the Finance Director, the Group Human Resources Director, the Head of Group Reward and the Company Secretary, who is also secretary to the Committee. None of these individuals were involved in determining their own remuneration. External advisers to the Committee Independent remuneration consultant, Willis Towers Watson, is formally appointed by the Committee and provided advice on directors remuneration to the Committee in The Committee noted that the firm are actuaries and administrators for the IMI Pension Fund. The Committee is comfortable that these activities do not represent a conflict of interest and that objective and independent advice continues to be received by the Committee from the dedicated team servicing it at Willis Towers Watson. During 2016, Willis Towers Watson has also supported management on some broader reward and human resource matters. The fees charged by Willis Towers Watson in respect of advice and services to the Committee totalled 50,000 and for support to management totalled 17,000 in Willis Towers Watson are signatories to the Remuneration Consultants Code of Conduct in the UK. A summary of the Committee activities during 2016 The Committee had three formal meetings during the year, and each was attended by all members. The principal agenda items were as follows: a review of total compensation packages of the executive directors and the most senior management of the Group to ensure alignment with IMI s strategic growth plan; approval of achievements and outcomes under the incentive plans; consideration of the fees for the Chairman; setting the framework and target levels for the 2016 incentive cycle including review of the performance targets attaching to the 2017 long-term incentive plan awards; approval of the granting of share awards to executive directors and certain other levels of management; a review of the UK corporate governance environment relative to remuneration; a risk review of the remuneration framework; a review of the engagement of the independent remuneration consultants to the Committee; and a review of the Committee s own performance, constitution and terms of reference. Attendance Director Voting outcome at the 2016 Annual General Meeting The following table summarises the details of votes cast for and against the remuneration report resolution including those votes withheld. The Committee was pleased with the level of support shown by shareholders and will continue to consider the views of, and feedback from, shareholders when setting and reporting on remuneration arrangements. Directors Remuneration Report Remuneration Committee meetings R J Stack 3 100% C-P Forster 3 100% B Nørgaard 3 100% % attended where eligible Votes for Votes against Votes withheld Annual Remuneration Policy 98.73% 1.27% 2,406,779 Strategic Review Corporate Governance Financial Statements

64 62 IMI plc Directors Remuneration Report Annual Remuneration Report (cont d) Executive single figure table (audited) Fixed pay ( 000) Annual variable pay ( 000) Long-term variable pay ( 000) Other items in the nature of remuneration ( 000) Director Base salary Pension Taxable benefits Annual incentive bonus Share Matching Plan ( SMP ) Performance Share Plan ( PSP ) Subtotal long-term variable pay Allemployee share plans Dividend equivalent payments Total ( 000) See page Page 64 Page 64 Page 65 Pages 65 to 66 Page 67 Pages 67 to 68 Page 69 Page 69 M W Selway R M Twite D J Shook , , R M Twite served on the Board of Halma plc during the year and received fees of 51,000 in respect of this appointment which he retained. These figures have been calculated as follows: Base salary: Pension: the actual salary receivable for the year. the cash allowance paid in lieu of pension. Taxable benefits: the gross value of all taxable benefits (or benefits that would be taxable in the UK) received in the year. Annual incentive bonus: the value of the annual incentive payable for performance in respect of the relevant financial year (half of this is automatically delivered in shares when the executive does not meet the share ownership requirement). Share Matching Plan: the value on vesting of the matching shares that were subject to performance over the three-year period ending on 31 December in the relevant financial year (see share price assumptions adjacent). Performance Share Plan: the value on vesting of shares that were subject to performance over the three-year period ending on 31 December in the relevant financial year (see share price assumptions adjacent). Share price assumptions: for shares vesting in 2017, that related to performance in the three years to 31 December 2016, the average share price over the final three months of , pence is used to estimate the value of shares on vesting. For shares vested in 2016, relating to performance in the three years to 31 December 2015, previously reported figures 1 are updated to reflect the actual share price on the date of vesting ( pence for the Share Matching Plan and pence for the Performance Share Plan). All-employee share plans: the value of free shares at award and dividends under the Employee Share Ownership Plan in the relevant financial year and the intrinsic value of Save as You Earn share options on the date of grant in the relevant financial year (applying a 10% discount as permitted under the Save as You Earn Share Plan). Dividend equivalent the value of dividend equivalent shares on vested but payments: unexercised awards under the share plans, valued at the price on the dividend payment date. 1 The average share price over the final three months of 2015 ( pence) was used.

65 Annual Report and Accounts Comparative data of pay spend The following information is intended to provide additional context regarding the total remuneration for executive directors. Relative importance of pay spend 2016 ( m) 2015 ( m) Change Acquisitions % Dividends % Total employment costs for Group (see Section on page 89) % In 2016, the total dividend for the year of 38.7 pence represented an increase of 1% over last year s 38.4 pence. Relative percentage change in remuneration for Chief Executive The Committee actively considers any increases in base pay for the Chief Executive relative to the broader employee population. However, benefits and bonus payments are not typically compared given they are driven by a far broader range of factors, such as local practices, eligibility, individual circumstances and role. Chief Executive Employees 1 Base salary 2% 2% Benefits -16% 5% Annual bonus 28% 37% 1 All UK head office employees. This comparison excludes our international workforce which we feel would not provide a true comparison given differing local market factors. Historical performance and remuneration In addition to considering executive remuneration in the context of internal comparisons, the Committee reviews historical outcomes under the variable pay plans. The graph below compares IMI s total shareholder return ( TSR ) to the FTSE100 over the last eight years. We compare performance to the FTSE100 as IMI has been included in the index in the past and it is a position where IMI aspires to be. TSR measures the returns that a company has provided for its shareholders, reflecting share price movements and assuming reinvestment of dividends (source: DataStream), with data averaged over the final 30 days of each financial year. As the graph below illustrates, IMI s absolute and relative TSR performance has been strong over the last eight years. This is reflected in the outcomes under our variable pay plans, which are largely driven by the financial performance of the Group and IMI s share price. Value of a hypothetical 100 investment IMI FTSE100 Introduction Strategic Review Corporate Governance Financial Statements

66 64 IMI plc Directors Remuneration Report Annual Remuneration Report (cont d) The following table summarises the total remuneration for the Chief Executive over the last eight years, and the outcomes of short and long-term incentive plans as a % of maximum. Financial year-ended 31 December Total remuneration (single figure, 000) Annual variable pay (% of maximum) Long-term variable pay (% of maximum) - Share Matching Plan Long-term variable pay (% of maximum) - Performance Share Plan 2,547 4,439 12,289 7,954 6,688 1,567 1,667 1,886 91% 95% 85% 47% 62% 36% 40% 50% 64% 97% 95% 100% 100% % 100% 100% 100% 82.6% % 1 Represents remuneration for M J Lamb who was Chief Executive from before 2008 until 31 December Represents remuneration for M W Selway who was appointed Chief Executive on 1 January Executive remuneration received in respect of 2016 Base salary Salaries effective January 2016 were agreed taking into account a range of factors including the prevailing economic conditions, the financial performance of the Group and salary increases for other employees. The average increase for employees was 2.7%, compared to 2.1% for the executive directors. M W Selway s, R M Twite s and D J Shook s salaries were increased by 1.9%, 2.0%, and 2.5% to 785,000, 454,000 and 410,000 respectively. Pension Executive directors are entitled to receive a taxable cash allowance instead of pension benefits. With the Committee s approval the executive directors may, at their discretion, redirect part or all of their allowance into any defined contribution pension arrangement in the country in which they are contracted. M W Selway receives a cash allowance of 30% of salary and D J Shook receives a cash allowance of 20% of salary. R M Twite receives a cash allowance of 35% of salary as a legacy obligation from his appointment as an executive director which continues to be honoured. The key elements of the benefits in the Fund are summarised below: the normal retirement age under the Fund is 62 and R M Twite may retire from employment with IMI any time after age 60 without actuarial discount; on death after retirement, a dependant s pension is provided equal to 50% of the member s pension; should he die within the first five years of retirement, the dependant s pension is increased to 100% of the member s pension for the remainder of the five year period; and pensions in payment, in excess of any guaranteed minimum pension, are increased each year in line with price inflation up to a maximum of 5% in respect of pension built up before 1 January 2006, and 2.5% in respect of pension built up after 1 January Accrued pension in the Fund as at 31 December pa Accrued pension in the Fund as at 31 December pa R M Twite Pension benefits for past service R M Twite was previously an active member of the defined benefit IMI Pension Fund. He opted out with effect from 1 February 2007, before he became an executive director and as a result, he retains past pensionable service up to that date in the IMI 2014 Deferred Fund ( the Fund ).

67 Annual Report and Accounts Benefits During the year the executive directors received a number of benefits. These are summarised below and amounts less than 10,000 p.a. are combined. Non-cash benefits ( 000) M W Selway R M Twite D J Shook Total Cash benefits and taxable allowances ( 000) Company car and fuel allowance Relocation Other Total In addition to the above benefits and allowances that are included in the single figure (refer to table on page 62), the executive directors are also beneficiaries of company policies that have no taxable value, including directors and officers insurance, death in service cover, travel insurance, the use of a company driver and personal accident cover. Annual incentive bonus The 2016 bonus plan focused on the financial performance of IMI during the year, considering Group profit before tax (40%), organic revenue growth (20%), cash conversion (20%) and strategic and personal objectives (20%). Health and safety will serve as an underpin to ensure bonuses are only paid out when minimum standards are achieved was a challenging year for IMI with difficult economic and market conditions contributing to weaker than targeted financial results when compared to 2015: Group profit before tax decreased to 208m in 2016 from 219m in 2015, representing a 5% decrease; Group revenue decreased by 5% on an organic basis compared to 2015; cash conversion was 95%, compared with 97% in 2015; the total dividend for the year increased by 1% compared to 2015; and strong performance for health and safety with leading measures showing benefits from lean and HSE integration in the year. Summarised in the table below is the achievement against Group targets set at the beginning of the year alongside the resulting contribution to bonus payout. Annual bonus metrics performance required Actual performance 2 Payout as a percentage of maximum Weighting as a percentage of total bonus opportunity Contribution to payout as a percentage of maximum bonus opportunity Group profit before tax Threshold 172.5m 180.4m 16% 40% 6% Target Maximum 197.2m 216.9m Introduction Strategic Review Corporate Governance Financial Statements Group organic revenue growth Threshold 1,454m 1,486m 39% 20% 8% Target 1,494m Maximum 1,534m Group cash conversion (FY figures shown) Threshold 76.0% 95% 82% 20% 18% Target 89.0% Maximum 98.0% 1 R M Twite s annual bonus opportunity is dependent on a combination of Group (35%) and Critical Engineering (45%) financial objectives in line with his role s responsibilities. The Committee believes that the divisional targets are commercially sensitive and these are therefore not disclosed in the table above. 2 Actual performance is stated at the exchange rates used in the targets.

68 66 IMI plc Directors Remuneration Report Annual Remuneration Report (cont d) In addition, each executive director has a number of personal objectives agreed with the individual during the first quarter of the financial year, and which pertain to areas directly within their remit. The Committee seeks to set personal objectives that are demanding and measurable, and in all cases they are subject to a robust and rigorous validation exercise at both the half and full year which take into account multiple points of reference. These personal objectives and the Committee s assessment of each executive director s performance against them is described below. Individual performance metrics 2016 performance required Payout as a percentage of maximum Individual performance objectives are robustly set and are customised for each individual. All objectives are measurable and are objectively determined. Individual objectives for 2016 were built around the Group s key performance indicators. M W Selway: Objectives included areas such as organisation, strategy, financial integrity and specific projects. R M Twite: Objectives included areas such as diversity, strategy, core process and specific projects. Weighting as a percentage of total bonus opportunity Contribution to payout as a percentage of maximum bonus opportunity 89.2% 20.0% 17.8% 96.6% 20.0% 19.3% D J Shook: Objectives included areas such as strengthening investor/analyst relationships, financial process improvements, strategy and specific information technology projects. 86.0% 20.0% 17.2% In aggregate this resulted in the following annual incentive bonus outcomes: 2016 maximum bonus opportunity (% of salary) Total bonus awarded ( 000) Total bonus awarded (% of salary) Achievement of share ownership guidelines at 31 Dec Bonus delivered in form of cash ( 000) Bonus delivered in form of shares ( 000) M W Selway 200% % R M Twite 150% % D J Shook 125% % Executive directors are subject to guidelines which require them to build a shareholding in IMI worth at least 250% of salary for M W Selway, 150% of salary for D J Shook and 200% of salary for R M Twite. When assessing compliance with this guideline the Committee reviews both the level of beneficial share ownership and vested but unexercised share incentive awards on a post-tax basis. Although M W Selway and D J Shook continue to make progress towards this guideline, and have a material interest in the Company s shares (as can be noted in the table on page 70), as a consequence of awards not having vested the Committee has determined that half of the annual bonus payable to M W Selway and D J Shook shall be delivered in shares which must be held for a period of at least three years and until the shareholding guideline has been met. Share interests granted to executive directors during 2016 (audited) Grants made under the IMI Incentive Plan ( IIP ) Grants under the IIP were made on 9 March 2016 in the form of nil-cost options. Awards are due to vest on 9 March 2019, subject to performance in three core areas aligned to our longer-term strategic priorities: return on capital employed (25%), relative Total Shareholder Return (25%) and Group profit before tax growth (50%). The performance targets that apply to the 2016 IIP awards are as follows: ROCE Relative TSR Group profit before tax growth Level of vesting Threshold 40% Median 2.5% 25% Maximum 50% Upper quartile 7.5% 100% Weighting 25% 25% 50% - The following grants were approved and made in 2016: IIP shares awarded Value on date of award 1 ( 000) Award as a percentage of salary M W Selway 213,007 1, % R M Twite 98, % D J Shook 66, % 1 The three day average mid-market price on the date of award was pence. The IIP is also used to grant deferred bonus awards exercisable after three years to satisfy annual bonuses delivered in the form of shares. Details of these additional IIP awards made in 2016 are shown in the table on page 70 under the without performance conditions column.

69 Annual Report and Accounts Awards vesting under legacy share plans The Share Matching Plan ( SMP ) the last grant made under this plan was in 2014 and it will vest in April M W Selway and R M Twite received an award under the SMP in April Vesting was subject to the achievement of an Economic Value Added ( EVA ) performance condition, measured over the three years ending 31 December The calculation of EVA is based on segmental operating profit after tax with appropriate The Performance Share Plan ( PSP ) the last grant made under this plan was in 2014 and will vest in March In March 2014, awards were made to M W Selway and R M Twite with vesting of the awards subject to the achievement of three independent performance conditions: EPS growth (50%), relative TSR (25%) and organic revenue growth (25%), measured over the three-year period ending 31 December On appointment (1 October 2013) M W Selway was made an award under the PSP worth 200% of salary subject to four independent performance conditions: TSR (20%) measured over the period 1 October 2013 to 30 September 2016, organic revenue growth (20%), EVA (20%) and EPS (40%) each measured over the period 1 January 2013 to 31 December The award vested in October EPS growth Under the PSP, EPS is defined as adjusted basic earnings per share before the post-tax impact of any reported exceptional items, which may include impairment losses, profit/ loss on disposal of a subsidiary, rationalisation costs, acquired intangible amortisation and IAS 39 charges or credits for changes in the fair value of financial instruments. EPS was chosen as an appropriate measure because it rewards absolute growth in underlying earnings and because the Committee believed it worked well in combination with TSR which is an external, relative measure of performance. adjustments, less a capital charge on the invested capital in the business reflecting IMI s cost of capital. The performance measure considered compound annual growth in EVA over the three financial years from 2014 to 2016 compared to EVA in the preceding three financial years. Awards lapse for negative compound growth. However, for positive growth between 0% and 6%, 10% to 25% of matching shares vest; and for growth between 6% and 17%, 25% to 100% of matching shares vest. Within each range, vesting is calculated on a straight-line basis. Over the period IMI delivered compound annual EVA growth of -5.6% based on three-year EVA from 2014 to 2016 of 479.7m compared to three-year EVA from 2011 to 2013 of 570.3m. The resultant vesting outcome in April 2017 is nil: Shares invested by the executive Initial matching award Value on date of award 1 ( 000) Number of matching shares vesting 1 The mid-market price on the date of award was 1, pence. 2 Awards will lapse in full on 1 April 2017 as a result of the EVA performance threshold not having been met. Additional dividend equivalent shares Total matching shares vesting Value of matching shares on vesting 2 ( 000) M W Selway 8,528 26, R M Twite 17,356 65, Growth of 6% per annum would trigger the minimum level of vesting (25% of the EPS element), increasing on a straightline basis such that the EPS element of the awards were eligible to vest in full for EPS growth of 15% per annum. Over the three year period ending 31 December 2016 IMI delivered EPS growth of -10.9% per annum, decreasing EPS from 72.6 pence in 2013 to a comparable 51.4 pence at the end of Over the three year period ending 31 December 2015 IMI delivered EPS growth of -5.7% per annum, decreasing EPS from 64.7 pence in to a comparable 54.2 pence at the end of Adjusted for 2014 share consolidation and the acquisition of Bopp & Reuther. 4 Adjusted for IAS 19. Relative TSR TSR is defined as the movement in share price during the performance period, measured in local currency, with adjustments to take account of changes in capital structure and dividends, which are assumed to be reinvested in shares on the ex-dividend date. TSR was chosen as a measure as it is an external, relative benchmark for performance that aligns executives rewards with the creation of shareholder value. The October 2013 and March 2014 peer groups each comprised of the companies shown on page 68, adjusted to take account of merger and acquisition activity during the performance period in line with the Committee s established guidelines. Introduction Strategic Review Corporate Governance Financial Statements

70 68 IMI plc Directors Remuneration Report Annual Remuneration Report (cont d) At the end of the three-year performance periods ending 30 September 2016 and 31 December 2016, the Company ranked 34 and 35 respectively in the peer groups. The Committee was in agreement that the outcomes under the TSR measure was reflective of the general underlying financial performance of the Company. Organic revenue growth Organic growth is calculated as an average annual growth rate, to encourage continued focus on organic growth. Revenue is defined as segmental revenues before exceptional items adjusted, at the Committee s discretion, to exclude the impact of material acquisitions and disposals by the Company completed during the performance period and to remove the impact of exchange rate movements. Organic revenue growth of 2.7% per annum would trigger the minimum level of vesting (25% of the organic revenue element) increasing on a straight-line basis such that this element of the awards were eligible to vest in full for growth of 8% per annum. Over the three year period ending 31 December 2016 IMI delivered growth of -2.5%. Over the three year period ending 31 December 2015 IMI delivered growth of -0.7%. Economic Value Added ( EVA ) Vesting in respect of the 2013 PSP award made to M W Selway was subject to the achievement of an EVA performance condition, measured over the three years ending 31 December The calculation of EVA is based on segmental operating profit after tax with appropriate adjustments, less a capital charge on the invested capital in the business reflecting IMI s cost of capital. The performance measure considered compound annual growth in EVA over the three financial years from 2013 to 2015 compared to EVA in the preceding three financial years. Awards lapse for negative compound growth. However, for positive growth between 0% and 6%, 10% to 25% of shares vest; and for growth between UK BBA Aviation Bodycote Cobham GKN Halma Johnson Matthey Meggitt Rotork Spectris Spirax-Sarco Engineering Vesuvius Weir Group Japan Amada Fanuc NSK SMC THK Yaskawa Electric 6% and 17%, 25% to 100% of the shares vest. Within each range, vesting is calculated on a straight-line basis. As disclosed in last year s report, over the period ending 31 December 2015, IMI delivered compound annual EVA growth of 2.9% based on three-year EVA from 2013 to 2015 of 557.4m compared to three-year EVA from 2010 to 2012 of 511.5m. US Borgwarner Eaton Emerson Electric Flowserve Corp Honeywell IDEX Ingersoll-Rand Illinois Tool Works Johnson Controls 1 Manitowoc Parker-Hannifin Pentair Continental Europe Atlas Copco Heidelberg Druckmaschinen Metso Corporation Sandvik SKF B Sulzer AG 1 Johnson Controls acquired Tyco International in September The 2013 PSP award in respect of M W Selway will vest only in relation to the EVA target having been met to an extent and consequently will vest at 3.46%. The 2014 PSP award in respect of M W Selway and R M Twite will lapse in full as a result of the performance thresholds not being met. M W Selway 2013 Initial award Value on date of award 2 ( 000) Number of shares vesting Additional dividend equivalent shares Total shares vesting Value of shares on vesting ( 000) 98,792 1,500 3, , M W Selway 75,950 1, R M Twite 29, The three day average mid-market price on the date of the 2013 and 2014 awards was 1, pence and 1, pence respectively. 3 Awards will lapse in full on 11 March 2017 as a result of the performance thresholds not having been met.

71 Annual Report and Accounts All-employee share plans Executive directors are eligible to participate in the all-employee share plans on the same terms as other eligible employees at IMI. In 2016, M W Selway, R M Twite and D J Shook received free share awards under the All Employee Share Ownership Plan. D J Shook received Save As You Earn awards in 2016 of 2,129 shares. M W Selway R M Twite D J Shook All Employee Share Ownership Plan Number of shares awarded Value of free share award 1 ( 000) Number of options awarded SAYE Value of SAYE options 2 ( 000) Dividends ( 000) Total value under the all-employee share plans ( 000) , In 2016 free shares were awarded at a share price of pence (1, pence in 2015). 2 In 2016 SAYE awards were made at a 10% discount and the value shown is the intrinsic gain at the date of the grant, calculated in accordance with the single figure requirements (on page 62). See Section on page 122. Dividend payments Under the SMP and PSP, dividend equivalent payments are made on vested but unexercised share awards, which take the form of nil-cost options. Dividend equivalents, while notionally tracked by IMI from grant to exercise, are not paid or transferred to the participant until the point of exercise. These have been included in the single figure (the table on page 62) based on the number of dividend equivalents notionally accrued in the financial year, valued at the price on the dividend payment date. Any residual cash is rolled over and applied to the subsequent dividend equivalent purchase. Payments to past directors (audited) It is the Committee s intention to disclose any payments to past directors, including the vesting of share-based awards post departure on a basis consistent with the executive directors. As all of the subsisting SMP and PSP awards made to D M Hurt in 2014 (who retired from the Board on 7 May 2015) have lapsed in full due to the minimum performance thresholds outlined above not being met, there were no payments to past directors during the year. Dividend equivalent payments for vested but unexercised nil-cost option awards will continue to be made to past directors under the terms of the original grant. Introduction Strategic Review Corporate Governance Financial Statements

72 70 IMI plc Directors Remuneration Report Annual Remuneration Report (cont d) Chairman s and non-executive directors single figure table (audited) The following table summarises the total fees and benefits paid to the Chairman and non-executive directors in respect of the financial years ending 31 December 2016 and 31 December Director 2016 ( 000) 2015 ( 000) Base fees Additional fees Total Base fees Additional fees Total Lord Smith of Kelvin C-P Forster B Nørgaard R J Stack R McInnes I Sharp Joined the IMI Board in 2015 and became the Chairman at the 2015 AGM. Annualised fee for the Chairman in 2015 was 300, Includes fees for being Chairman of the Remuneration Committee and Senior Independent Director. 3 Includes fees for being Chairman of the Audit Committee. 4 Joined the IMI Board on 1 September 2015 and is a member of the Audit Committee. Directors shareholdings and share interests (audited) The following table summarises the share interests of any director who served during the year as at 31 December 2016 or at the date of retirement from the Board. During the period 31 December 2016 to 23 February 2017 there were no changes in the interests of any current director from those shown save for purchases within the IMI All Employee Share Ownership Plan on 10 January 2017 of 12 shares on behalf of M W Selway, R M Twite and D J Shook at 1,067p per share and 14 February 2017 of 10 shares on behalf of each of M W Selway, R M Twite and D J Shook at 1,216.75p per share. Director Total interests Beneficial interests Scheme interests Nil-cost options All-employee share plans With performance conditions Without performance conditions Unvested Vested but unexercised Unvested Vested but unexercised M W Selway 567,785 9, ,087 3,757 57,457-1,149 R M Twite 408, , , ,820 D J Shook 135,426 4, ,014-10, Lord Smith of Kelvin 8,300 8, C-P Forster 2,625 2, B Nørgaard 2,625 2, R J Stack 13,125 13, R McInnes 3,000 3, I Sharp 3,000 3, From 2015, the Committee requires M W Selway to build up a shareholding of at least 250% of salary, 200% of salary in the case of R M Twite and 150% of salary for D J Shook, to mirror the IMI Incentive Plan award. At the end of the year R M Twite significantly exceeded the share ownership guideline.

73 Annual Report and Accounts Application of the Directors Remuneration Policy in 2017 Service contracts The unexpired terms of the non-executive directors service contracts can be reviewed in the Board s Corporate Governance Report on page 49. Executive director fixed pay Salaries effective January 2017 were agreed taking into account a range of factors including the prevailing economic conditions, the financial performance of the Group and salary increases for other employees. The average increase for employees was 2.6%, compared to 2.0% for the executive directors. M W Selway s, R M Twite s and D J Shook s salaries were all increased by 2% to 801,000, 463,000 and 418,000 respectively. Other elements of fixed pay (benefits and pension) will remain unchanged. Incentive pay Annual bonus In accordance with the approved remuneration policy, the annual bonus plan will be operated as follows in 2017: as in 2016, the 2017 maximum bonus opportunity is set at 200% of salary for M W Selway, 150% for R M Twite and 125% for D J Shook; as in 2016, the annual bonus for M W Selway and D J Shook will be subject to performance in Group profit before tax (40%), organic revenue (20%), cash conversion (20%) and strategic and personal objectives (20%). Health and safety will serve as an underpin to ensure bonuses are only paid out when minimum standards are achieved; as in 2016, the annual bonus for R M Twite in 2017 will be subject to performance in Group profit before tax (35%), Critical Engineering operating profit (15%), Critical Engineering organic revenue (15%), Critical Engineering cash conversion (15%) and strategic and personal objectives (20%); and the Committee has determined that the targets associated with the performance measures will be disclosed retrospectively on the same basis and to the same extent as for 2016 targets (see annual bonus metrics table on page 65). IMI Incentive Plan ( IIP ) In accordance with the approved remuneration policy, the IIP will be operated as follows in 2017: 2017 awards are set at 250% of salary for M W Selway, 200% for R M Twite and 150% for D J Shook; and awards will vest subject to performance in three core areas aligned to our longer-term strategic priorities: return on capital employed (25%), relative Total Shareholder Return (25%) and Group profit before tax growth (50%). The performance targets that will apply to the 2017 IIP awards are as follows: ROCE Relative TSR Group profit before tax growth Fees for the Chairman and non-executive directors The Chairman and non-executive directors remuneration increased by 2%, effective 1 January This is in line with the executive directors and the wider employee workforce. Share ownership for the Chairman and non-executive directors The Chairman and non-executive directors are encouraged to hold some shares in IMI within a reasonable period after their appointment. As at 23 February 2017, the Chairman and non-executive directors hold IMI shares as set out in the table on page 70. Bob Stack Chairman of the Remuneration Committee for and on behalf of the Board 23 February 2017 Level of vesting Threshold 40% Median 2.5% 25% Maximum 50% Upper quartile 7.5% 100% Weighting 25% 25% 50% - Introduction Strategic Review Corporate Governance Financial Statements

74 72 Financial Statements 74 Finance Director s introduction 76 Primary statements 84 Section 1 - Basis of preparation 85 Section 2 - Results for the year 96 Section 3 - Operating assets and liabilities 102 Section 4 - Capital structure and financing costs 126 Section 5 - Other notes 132 Directors Report 154 Five year summary 156 Shareholder and general information Engineering GREAT the IMI Way The production line for Hydronic Engineering s new actuator range TA-Slider, is the most advanced in terms of error proofing, which helps to ensure great quality for our customers

75 Annual Report and Accounts Introduction Strategic Review Corporate Governance Financial Statements